Credit card debt can often feel like an endless circle. You make payments every month, but it still doesn’t seem to come down. Considering the interest rates, having a big credit card debt can hurt your finances and even cause you debt stress.
The good thing is that there’s always a way to get out of debt. However, you’ll need a good strategy, so we’ll take you through a few of the most effective ones.
Consider Debt Consolidation
If you have a good credit score but are servicing multiple loans, you can consider consolidating them. This brings all your loans into a single account, such that you only need to make a single payment every month.
Going for another loan might seem counterproductive, but it can actually help make everything cheaper and stress-free. You stop worrying about multiple loans, and in most cases, you even get a cheaper interest rate.
The process is simple when you approach a creditor, and there are even easy debt consolidation loans that won’t affect your credit score, and everything is handled online. However, ensure you look at the transfer fee, interest rates, and repayment terms. Negotiate for payments that are suitable to you but will still help you get to financial freedom faster.
Pick a Payment Strategy: Snowball or Avalanche?
When paying off multiple loans, you need a strategy that can keep you, the debt, and your credit score in check. Here, there are two tested and proven approaches you can pick from (or mix and match).
The first is the debt Snowball method. It involves coming up with a list of your debts and prioritising them by the amount. You then start by paying off the smallest and moving to the next one regardless of the interest rate. In this method, the benefit is psychological – you knock off debts and use the quick wins to build momentum. When a loan is fully repaid, the monthly payments go to the bigger loans.
An alternative is the Avalanche approach. It also starts by listing all debts but ranks them based on the interest rate. Instead of paying the smallest debt, you pay off the card with the highest interest rate. You then move on to the next one and continue until all are paid off. This approach can see you wait for your first win for long, but it’s the most efficient in savings.
So which one should you choose?
Well, there’s no wrong or right answer here. The choice should depend on how your mind works best. If you want small wins to stay motivated, go with Snowball. If you want to save every cent you can, Avalanche will work for you.
Set Up a “Debt Payoff” Budget
While we can get into debt due to situations like medical emergencies, at other times, it’s due to poor expenditures. To pay off your credit card debt faster, you need to have a clear idea of where your money goes and a budget for paying off the debt.
A standard budgeting strategy for such situations is the 50/30/20 approach. Basically, it involves listing all your expenditures and dividing your income into three categories: 50% for needs (like rent, groceries, and utilities), 30% for wants (entertainment, dining out, and hobbies), and 20% for savings or debt reduction.
With credit card debt in the picture, you need to allocate that 20% to paying off your debt. Try to limit the “wants” as much as you can so that you can increase the 20% allocation for debt.
Engage your creditors
You don’t have to walk the journey alone if the situation is difficult. Many creditors in Australia are open to working with customers to manage their debts, especially if you’ve been a longtime customer and have a good track record of payments. If they have a hardship program, it can help provide some relief in circumstances beyond your control, such as unemployment or illness.
The creditor may also be willing to lower your interest rate or even offer you a temporary pause on payments. All these small reliefs can be all you need to get back on track during tough situations. They help manage debt better and without stress, which translates into clearing the debt faster.