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Five ways to clear debt fast
If you find yourself struggling to get out of debt, the frustration of doing so is often overwhelming. But with a few simple rules to follow you can join the growing ranks of Australians swapping credit for savings.
Spend within your means
Sure, we can spend more than we earn at times, says finance guru Paul Clitheroe.
“I have no problem with us borrowing money to buy decent assets, such as a house,” he said. “But if we spend more than we earn, using credit cards, car loans and so on, our debts grow.”
Doing this for years, he says, will eventually send us broke: “So what we do in our personal budget is keep a sense of balance.”
Pay off your credit card fast
Credit cards can be a great tool, if used correctly – that is, when the balance is repaid in full within the interest free period. But many of us fall into the credit card debt trap at some stage of our lives.
Some simple maths should help to convince you of the benefits of increasing repayments on your card debt. RateCity calculations show that if you took a low-rate card – say 10 percent – and only repaid your debt at the monthly minimum – say 2 percent, you might be surprised at how long it would take to repay in full. A $1000 balance would take you over 13 years to clear, a $5000 balance nearly 30 years and a $10,000 balance would take a whopping 36 years.
“The number one way out is to pay the debt off faster, the simple act of moving from 2 percent of balance repaid every month to 4 percent can have a significant impact,” she said.
On a $10,000 debt at 14 percent, paying 4 percent off every month will see you clear the debt in 13 years, as opposed to over 36 years if you only repay 2 percent.
Pay less interest
Another useful way to deal with a large credit card debt is via a balance transfer card, which allows you to transfer the balance across to another card – usually with no or lower interest – and close the first one down.
“Balance transfers aren’t a ‘get out of goal free card’ though. You still owe the same amount of money and if you don’t repay it in full during the honeymoon period, you may face a jump in interest rate back to, or even, above what you were paying before the transfer,” said Hutchison. “But if used correctly, a balance transfer can be a good way out to getting back on track with your debts.”
Swap credit for debit
More than three-quarters of respondents in a recent Dun & Bradstreet Consumer Credit Expectations Survey said they had debit card accounts – the highest percentage since September 2009.
“The use of debit cards is becoming more common, as is a level of caution towards borrowing and debt in general, which has been evident in the increased level of credit card repayments shown in the RBA (Reserve Bank of Australia)’s November 2012 figures,” said Dun & Bradstreet chief executive Gareth Jones.
Avoid new debt
The percentage of Aussies planning to take on debt in the next couple of months is at three-year lows, according to the Dun & Bradstreet Survey.
Applications for home loans, personal loans and credit cards and credit limit increases are set to be flat in the March quarter, with only 18 percent of respondents planning to take on debt in the coming months. That’s down from 22 percent in the December quarter and 26 percent in the three months to September, said Jones.
“Overall, we’ve witnessed a sizeable shift in the spending behaviour of the Australian consumer. There is a greater degree of consideration being applied to each spending decision and a greater focus on spending within our means.”
Disclaimer
This article is over two years old, last updated on February 25, 2013. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent credit cards articles.
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