Reserve Bank of Australia figures show Australians already owed a massive $49.6 billion on plastic, with more than $33.4 billion of that accruing interest – and that was before they started their Christmas shopping.
So here’s five steps to slashing that mounting plastic debt and returning to the black in 2015.
1. DESTROY THOSE CARDS
This is an easy way to put an immediate stop to the temptation of spending more using your card. Mozo found the average credit card rate is 17.49 per cent, and on some cards the rate is as high as 23.5 per cent. This is an expensive way to buy things if you are not paying your card off in full each month. Whether you use scissors or a saw, rip up that card and say goodbye to plastic debt.
2. PLAN OF ATTACK
Check your latest card statements and work out how much debt you have. Then set up a realistic plan of attack on how to pay it back. “Get organised and make a monthly repayment plan for yourself,” comparison site Mozo’s spokeswoman Kirsty Lamont says. “Determine how much you can afford to pay off your card each month and set down a repayment amount.” She suggests the best way to do this is by setting up direct debits that automatically go onto your card debt.
3. PAY OFF MORE THAN THE MINIMUM AMOUNT
This is the key to culling credit card debt. Just paying off the minimum amount means it will take you years longer to kill your debt and you’ll fork out a fortune in interest charges. The MoneySmart.gov.au calculator shows that on the average card debt of $3,173 with an interest rate of 17.49 per cent, the minimum monthly repayment starts at $65. A cardholder would end up taking 24 years to pay off the debt, and would pay more than $6,400 in interest. However, if they more than doubled their minimum repayments, outlaying $155 per month, they would take just two years to pay off the card and fork out interest of only $550.
4. BALANCE-TRANSFER DEALS
Lamont says there are plenty of great balance transfers available on the market that allow customers to cut debt without paying interest. “With a balance-transfer card, you can avoid paying interest on your card for up to 18 months. This means more of your repayments will be going towards your debt rather than your interest charges,” she says. “They can help you pay off debts faster.” Balance-transfer deals allow customers to transfer plastic debts from one card to another and in many cases enjoy zero per cent interest rate periods to shave back the debt. Mozo’s database shows 18 months is the longest interest-free deal available on these types of cards. But if you do switch to a balance-transfer card, cut it up as soon as you get it so there’s no temptation to spend on it. If you make purchases on the card or fail to pay it off over the interest-free period, you will be hit with higher than average rates.
5. ONLY PAY USING DEBIT
Adopt a new approach to paying for goods in 2015. “Stop using the credit card and look at alternatives such as paying by debit card,” says MoneySmart’s senior executive leader, Miles Larbey. This will put the brakes on your card debt becoming bigger. It also means that you are only using money you already have and not money that you don’t have. Sometimes retailers will give you discounts for paying in cash and some banks offer cash back when you pay by debit card, so it’s a win, win.