Reduce credit card debt

Reducing credit card debt is no easy task. We’ve all been there and know the struggles in combating the ever-growing money monster. But with a little discipline and dedicated planning, you can ninja your way out of your credit card debt in no time.

Credit card traps to be weary of

So you’ve signed up for a new card or even a balance transfer that covers one debt with another card, with a credit card that promises super low interest for the first 6 months and have an excellent reward system in place. Hmm. Sounds like you’re off to a flying start! More money to spend and less to pay. Reward points accruing, even doubling or tripling when you shop at certain outlets, giving you more incentive to shop more.

But what we forget sometimes, is that after the honeymoon period the percentage rate charged for your purchases is likely to jump dramatically. In some cases may start at next to nothing then after 6 months go straight to 20% or more. Sounds criminal doesn't it? Remember, you signed up for it, so if you’re not prepared to repay your credit card in a timely manner, then you’re really better off without one.

Still thinking about a balance transfer? Compare balance transfer offers on Mozo here.

Tip: Say you’ve signed up for an interest free credit card for the first 6 months, and you go out to buy $6000 worth of new furniture, then the most advisable way to manage the debt is to divide the time period with the debt value to see how much you should be paying off each week. In this instance it’s: $6000 / 6 months = $1000 per month, which is $250 pw. If you can’t dedicate $250 per week out of your pay, then work out how much you can repay in that 6 month period and reduce the amount you spend.

Smart ways on how to reduce credit card debt

Everyone has experienced credit card debt creep up on them unexpectedly. Even when playing carefully with your imaginary money, life gets in the way and you can easily lose track of your accounts, even for the most organised. So if you find yourself needing to reduce your credit card debt fast, check out the table to see what suits you best. You could even consider a combination of them too.

Reducing credit card debt options Pros Cons

Debt consolidation loan -

where you take out a loan to pay off another, usually arranged with a different lender.

  • Makes managing debt easier as you’re reducing multiple payments to one.
  • Percentage rate may be much lower than what you’ve been locked into, therefore reducing your overall monthly repayments.
  • Temptation to spend more, especially as you have more money to play with.
  • Doesn’t necessarily solve the spending issue. A consolidation loan is more of a bandaid solution until you start practising better money management.

Balance transfer credit card -

when you use another credit card to pay off your current credit card debt.

  • Usually when you secure a lower or no interest credit card to pay off your credit card debt.
  • Usually less monthly repayments.
  • If you make much more than the minimum monthly repayments, you could be out of debt even faster.
  • A credit card is literally plastic money that is not tangible. For some can be a temptation to spend more.
  • Doesn’t necessarily solve the spending issue. Like a consolidation loan, a balance transfer credit card is more of a bandaid solution until you start practising better money management.

Personal loan -

a typical loan solution for consolidating credit card debt.

  • With one easy payment, simplifying and staying on top of your debt can feel easier and hassle-free.
  • Selecting a fixed rate instead of a variable can predict your repayments and will help you plan your monthly budget better.
  • Ideally the rate you secure will be less than your predictably higher credit card rate, reducing your monthly repayments.
  • With the extra money you have from reduced repayments, you could put toward your personal loan to pay off your debt sooner.
  • There may be temptation to to use the extra money you save on your repayments to spend, which is fine, as long as you don’t exceed that amount and spiral further into debt.
  • Although it can feel quite liberating consolidating your debt and reducing your rate and repayments, you still need to address why the debt accrued in the first place. Was it mismanaged spending? This is a good time to do a money management health-care and take a more conscious approach to spending your hard-earned cash.

Refinance your home loan -

when you unlock the existing equity in your home to pay your credit card debt.

  • Usually secured at a lower interest rate saving you money in the long term.
  • Putting your home at risk for the sake paying off a credit card may not be the most ideal scenario. Afterall, how secure is your income?

Rediscover cash

Ready to go old-school? Remember those little coins that used to weigh our pockets or handbags down and went cling cling cling? Well, coins and notes are cold hard cash and are making a comeback dontcha know? Mozo knows that the convenience of living in a cashless society is already in place, but it’s not without its traps.

With more and more reliance on the plastic card, we are getting even more tempted to whip it out to pay for stuff we don’t really need with imaginary money. Think about it. If we spent most of our shopping time paying for groceries, clothing, toys and other household items with cash, we may think twice before handing it over. It’s not called cold hard cash for nothing - after all, after residing in our pockets and without our body warmth, it kinda really does become cold as soon as it leaves our hand.

Tip: The scenarios where scammers can potentially skim your credit card while withdrawing money from an ATM in Australia is increasing. Avoid using ATMs where you can and withdraw your money from your bank’ branch, the supermarket or at the Post Office.

Credit Card Repayment calculator

Let’s get serious. There’s no point in hiding under the covers and hoping your credit card debt goes away. We get it - you’re a generous person who likes to splurge on people you care about. And yes, we know that you deserve that extra magazine subscription, the new outfit, and who could resist the matching shoes. But enough poking fun. Dealing with spending is to deal with the consequences. And if you’re spending more than you’re earning, then guess what? You’re gonna get into a whole lotta red tape.

Let’s focus on creating a setting a realistic repayment plan. You’ve probably worked out by now that we’re interested in creating a more comfortable money environment for you. It doesn't have to be scary or complicated. That’s why we’ve created a Mozo credit cards repayments calculator so you can start to work out an easier way to eliminating your credit card debt.

Scenario - Jeff buys up. Big time.

Jeff earns $130,000 gross. That means he receives just under $1500 per week or just less than $6000 per month, after tax. His monthly expenses include:

  • Rent: $2000
  • Car repayments: $1500
  • Groceries: $1000
  • Eating out and entertainment: $2000
  • Petrol: $400
  • Public transport: $200

His monthly tally is on average: $7100, or $85,200 pa.

That means Jeff regularly relies on his credit card to cover the balance that his wage doesn’t cover. In one year, he would spend on average $13,200 on his credit card for seemingly ‘essential’ monthly expenses.

On top of Jeff’s yearly ‘essential’ expenses, he also buys:

  • his dad a new lawnmower for his 65th birthday: $700
  • a 5 day surf trip to Bali with mates: $2000
  • new clothes: $1500
  • sunnies: $200
  • designer sneakers: $200
  • turntable and DJ lessons: $2600

That’s an additional: $7,200 for the year.

So, all expenses on average over the course of one year will total: $92,400

Let’s average this out his yearly expenses. If Jeff earns $6000 per month after tax, that gives him: $72,000 to play with.That means, in one year he’s accumulated and out of pocket by $20,400 on average. and there’s only one guess how he’s getting by. Yep, you guessed it. He relies on his credit card.

If he’s going to manage his credit card debt for $20,400 at 5% per annum, then he needs to pay $1700 per month + 5% ($85) = $1785 per month.

That means the interest rate charge alone is $1020 per year.

To manage his credit card debt, Jeff will need to pay just a little over $445 per week, just to repay his debt. But as we saw earlier in what Jeff considered his ‘essential’ expenses, some of them will need to be revised if he wants to stay on top of his debts. The worst thing he could do is use his credit card further as this will likely spiral him deeper in debt.

Let’s read on to see how Jeff and yourself can help yourself reduce your credit card debt. Everything helps!

Tips for reducing your credit card bill

1. Reduce your spending

Mozo knows that designer anything looks good and feels good. We know because we occasionally splurge too! But it doesn't mean that everything needs to be designer. Be selective with what you pay big bucks for.

As we saw if Jeff’s scenario, he’s just an average guy with a pretty high income who has some fussy spending habits. All he needs to do, and perhaps you too, is curb your spending just enough to make the biggest impact. Do you need the designer sunnies for $200 when you could buy a pretty decent no-name pair with Australian standard UV protection for $25?

2. Recycle

We could have easily titled this section: Reduce and Reuse. Have you considered second hand shopping? There’s a motza of excellent high-end fashion lining the racks at your local charity store or specialist vintage parlour with items thrown out as quickly as they’ve been purchased it seems.

You could even start trawling through your own wardrobe and list the items you no longer wear (or never have worn) on online stores or hold a stall at your nearby popular weekend market. You may only receive $5-$50 for each item you happily paid triple the amount for, but at the end of the day you could earn enough to pay your rent or mortgage for the week, or even a good chunk off your credit card debt. Now that’s truly creating good value of silver fish fodder. (Cruel to be kind, sorry).

3. Negotiate a better rate

Ready to start a conversation with your current credit card provider to negotiate your current rate? It’s a great way to reduce it! You may be surprised that you can actually negotiate your current credit card rate. Most people are and hardly try. Give it a go and see what new solutions your lender comes up with for you.

Afterall, it’s better to negotiate your current rate then apply for a new card with a new lender at a lower rate. Why? Because you will be minimising the enquiries on your credit history and keeping your file as clean as possible.

You may think you’re just one person insignificant customer in a sea of thousands, but your lender would still rather you remained a customer than lose you to a competitor.

Just a little warning, not all consultants will be immediately helpful. You may need to be persistent with your request by making a few phone calls to the same lender or asking to speaking to someone with more authority. Remember that although it may be frustrating, it’s best to keep your cool throughout your conversations and remaining polite. No one ever gets what they want through anger and frustration.

Tip: Before starting the conversation with your lender, you’re better off building up your case by reminding them number of the number of years you’ve loyally dedicated to using their products and services and your good reputation in repaying your debts, on time.

Do your research and see what the competitors are advertising their credit card products at and use this comparison as leverage.