How to cull your credit card debt once and for all

Kinderling News & Features

Having kids can be an expensive thing to do, and the credit card can come out more than we'd like it to.

Effie Zahos is the editor of Money Magazine and she shares her advice for reducing credit card debt as a family.

1. Figure out why you’re spending

The first step when approaching your credit card debt is to know where and why you’re spending. This will almost definitely require an afternoon of going through your outgoing expenses and writing down where your money is going. To do this you’ll need either a big glass of wine or a reasonably sized pot of tea. If you can farm out the kids for a few hours so you can focus completely and understanding your situation best.

The point of paying off your credit card is to stop relying on using credit as a payment option altogether. To figure that out you need to assess WHY you’re spending on credit. Effie reminds us that we do get a great deal of “emotional satisfaction from buying things. There are reasons that we get into debt and sometimes it’s more complicated than we like to think. Get some help, go to a financial counsellor [which is a free service you can access] and address the issue of WHY am I spending.”

2. Be patient

You aren’t going to pay off your debt in a couple of weeks or months. It can even take years. Effie stresses that, much like dieting, there is no quick fix. It takes slowly changing habits and consistency to start to feel change. Understanding that change takes time is one of the hardest parts of paying off your debts. Being realistic with yourself before you get down to the nitty gritty numbers will help with keeping you on track to getting out of debt for good.

Listen to Effie on Kinderling Conversation:

3. Put aside an emergency fund before you start

One of the biggest traps people fall into when trying to pay off debt is paying it off in big chunks. We do this because it gives us a sense of achievement, but then we have nothing left by the end of the fortnight or month, and out comes the card again. This just creates an exhausting cycle or debt and repayment.

Effie recommends that before you task yourself with setting up a payment plan for your card, you need to have a small amount of money set aside for the 'emergencies'. Those surprise expenses that our credit card tends to come out for; the weekend doctors’ visits, medical tests, forgotten bills. This 'emergency fund' doesn’t need to be thousands of dollars, but something that reflects your spending on those items that normally go on your credit card.

Getting this fund up does take time, and you can fall into the trap of feeling like you’re not accomplishing anything, but you are! Effie says “Don’t feel bad if you can't get there in a year, that’s ok. Because you won’t get there at all if you don’t have that emergency fund.” Once you’ve set aside that emergency money (say $1000) you can start going about paying off your debts knowing you aren’t going to be penniless or undoing your hard work.

4. Prioritise either your small debt or highest interest rate

When it comes to paying off debts there are two schools of thought that Effie says work equally well. You can either pay off the debt with the highest interest rate first, or the smaller one.

If you’re the kind of person that likes to feel like you’re accomplishing something in order to keep going, go with the smaller debt first. The simple act of having it paid off is like a trophy for achievement in adult-ing and will spur you on to pay off the next amount.

5. Budget

There is no way to make budgeting sexy. It’s so boring that even writing about it makes me want to turn off my computer and hide in the toilets for the rest of the day. The silver lining to this tedious and average cloud system is, Effie says, that once you do it you shouldn’t have to revisit it for at least another year.

There are three biggest areas in your budget that you can save money according to Effie.

  • Your mortgage
    A necessary debt, your mortgage is somewhere that we feel hemmed in by, when it’s often not the case! “If you’re paying more than 4% (on your home loan) you can do better… I think the cheapest rate around is 3.6 or 3.8% then you’ve got instant savings right there!  On a half a million-dollar mortgage of about 0.5% you’d save $190 per month in repayments. There’s$ 190 that you can use elsewhere.
  • Your IT
    Shopping around for cheaper options on the market when it comes to streaming services, entertainment, internet access and so on, is a clever way to cut out some unnecessary cost; costs that can make up huge sums over the years. “Broadband and internet access is huge. If you’re on a higher phone plan, see if you’re getting value for money… Your big brands have carriers with other smaller players so you’re still … on the same network provider, still getting the same quality at a fraction of the price,” she suggests.
  • Energy use
    In the same way that big player telco companies seem to have the monopoly of the communication market, so too do leading energy providers. You’re never completely trapped when it comes to how your home is ‘turned on’ and often changing to a cheaper provider is as easy as jumping online. Effie adds “Energy is huge… I locked in a saving of 15% off each month by changing providers. There are so many comparison websites so have a look and the easiest way to get some cash back."

There are some great free tools to help, like ASIC Money Smart’s free budget planner. You can figure out how much you should put away every pay cycle for your more infrequent bills such as quarterly gas and electricity.

6. Make payments and savings automatic

The glory of the internet means so much of our banking can be set up without us having to lift so much as a finger (literally). These days most banks allow you to have a number of accounts for no extra cost. You can use these systems to create your own virtual ‘bucket’ system whereby you divvy up your pay as necessary. Try and set up automatic payments that happen the day after your pay arrives, set to the frequency of your pay (so weekly, fortnightly, or monthly)

Effie adds “You’ve got to make it automatic. We’re so geared for short term benefits [rather than] seeing the long-term picture.”

Good luck!