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1. Evaluate your debt.

Write it all down on paper or put it in an Excel sheet. Be sure to include the specific interest rate you’re paying on each balance, and all the balance payment due dates. If you’re an Excel sheet whiz, you might enjoy creating a form that calculates accruing and compounding interests in different scenarios. This exercise will help you see what you owe clearly and objectively, which lays the foundation for taking your next steps.

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2. Pick a strategy.

There are essentially two schools of thought on how to attack your credit card debt. The first advises that you start by paying down debt with the highest interest rate first, which would give you the biggest interest savings and reduce the total outstanding amount over time.

 

The second school of thought, known as the Snowball Method, advocates paying off the card with the smallest outstanding balance first, because most people find debt easier to tackle this way.

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Depending on your debts and interest rates, you might find that paying off the highest credit card debt first will save you money in the longer term. On the other hand, if your interest rates are similar across the board, you might find that the Snowball method offers better motivation.

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3. Consider your alternatives.

Looking at your debt summary from step one, you might now wish to consider debt consolidation. Balance transfers and personal loans are the two most popular options for this strategy of moving several debts into one account so you have one monthly payment.

• Balance transfers

A balance transfer might be just what you need to buy yourself time as you chip away at the debt. Balance transfer offers can be as attractive as 0% for up to 24 months. This type of introductory offer lets you consolidate all your existing credit card debts on to a new credit card, with no interest on the balance during the promotional period.

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Be aware that the interest rate reverts to the standard purchase or cash advance rate once the promotional period ends, and could be over 20%. If you can pay off your debt within the interest-free period, though, a balance transfer is a great option.

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• Personal loans

Another way to consolidate all your existing debt is by taking up a personal loan. This means you’ll take out a loan for the total amount of your credit card debt so you can pay them all off at once. After that, you will pay down your personal loan by making fixed monthly repayments at a lower interest rate.

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When researching your options, be sure to read the fine print and to take note of all applicable fees and limitations. You don’t want to end up paying more on extras than you’ll save by consolidating.

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4. Use whatever you have.

An analysis of RBA and Roy Morgan data shows that the average debt on credit cards lasts 27 years. In light of a shocking statistic like that, it would be prudent to put as much as you can towards paying down your credit card debt now.

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Since the earning interest rates of your savings accounts will never come close to credit card interest rates, there is no sense in hoarding those rainy day funds while your credit card balances bloat with interest charges. It is smarter and cheaper in the long run to you put every available dollar towards your credit card bill right now.

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This includes your upcoming tax refund, which will go a long way towards paying down your credit card balances. Also, if you’re serious about obliterating your debt, it might be time to consider liquidating where feasible. Stocks, bonds, second cars - use whatever you have and use it fast, before the interest piles up.

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5. Learn to budget.

Although the ‘b’ word may sound like a turn-off, budgeting is really helpful for getting your finances in order. First, you need to track your spending. There are apps like Pocketbook that make expenditure tracking a breeze, or you can keep receipts and refer to your bank account statements if you prefer.

 

After tracking your expenses for a few weeks, you’ll be able to see some clear patterns in your spending habits. What is it you need to cut back on in order to set aside a fixed monthly amount for repaying your debt? Decide on a reasonable amount that you can allocate for this purpose each month and then work backwards. If you make $5,000 a month and have to pay $2,500 for utilities and rent, you can set aside $500 for paying down your credit card bills. That would leave you with $2,000, which you can then allocate to food and other expenses. Discover more tips for planning your budget.

 

6. Tighten the belt.

It may be painful for a while, but cutting back on your spending will pay off when you’re free of debt again. Seriously think about how you can reduce your expenditure, and then do it. It may require sacrificing some luxuries, but you’ll be glad you did it when those debts are finally paid off and you can spend without guilt.

 

7. Discipline and organize yourself.

This entire process will require developing a fair amount of discipline. Start by sticking to the budget you’ve set in step five. Take some time to let the mentality of step six sink in. You’ve been accustomed to swiping and tapping, now your mind needs to be retrained to think before you pay.   

 

Also, good organisation will really help going forward. To ensure you stick to your budget and strategy, schedule an automatic monthly payment to your credit card. Pick a date before your monthly balance due date, and set up an automatic transfer for the budgeted repayment amount to be paid to your credit card each month.

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8. Make maximum payments.

Making only the minimum payment on your credit card bill prolongs the debt. The same RBA and Roy Morgan data mentioned earlier reported that the minimum required credit card payment has been cut from a measly 2.44% to an even smaller 2.35%. That means: if you’re only making the minimum payment each month, you’re going to be stuck in debt for a long, long, long time.

 

Minimum payments attract compounding interests, which means you could be paying interest on your interest and sinking further into debt. Always pay as much as you can, as soon as you possibly can. If you want to know the actual “minimum” you have to pay in order to avoid paying interest on interest, look at your credit card bills to see how much your monthly interest charges are worth. You should budget to pay as much as you can above that amount in order to pay off your principal debt.      

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As you start to see the light at the end of the tunnel, you might be tempted to reward yourself with a celebratory splurge but stay strong until you’re completely out of debt! Even after you’re debt-free, remember: thrifty is the sustainable way to live. So what are you waiting for? Start planning and take control of your finances this financial year.

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