Whilst Covid isn’t done and dusted, here in Newcastle, it feels like it’s at least manageable. Life is getting back to normal. It’s time to start thinking about the recovery. Forget the economy for a minute – focus on what you can control – your own financial recovery.
A great place to start is your credit card. Why? So you can stop that nagging doubt, stop the worry and stop the disagreements it causes at home.
As a financial adviser I regularly get asked questions like, how can I pay my credit card off more quickly? How can I get rid of my credit card? Why do I even have a credit card? All good questions.
Let’s start with four simple steps to help you pay your credit card down more quickly. After that you can decide if you want to keep your credit card or get rid of it. Whilst I’m focussing on credit card debt, the same principles hold true for personal debt and buy now pay later scheme’s like Afterpay and Zip.
Step one – find out what the interest rate is on your credit card, Afterpay or Zip account.
Recently we’ve seen banks dropping mortgage rates but credit card, Afterpay and Zip rates have remained firm. Why is this important? Your mortgage rate might be around the 2.5% mark, your credit card, Afterpay or Zip may easily be around the 20% mark, particularly if you have passed the interest-free or honeymoon period.
Let’s put this in context – $10k credit card, Afterpay or Zip balance @ 20% means you’re paying interest of $2,000 each year.
What did you actually get for that $2,000? You gained the ability to spend that money before you earned it. You gained ease and simplicity and perhaps retail therapy. What do you get for it going forwards? Nothing, it’s a pure cost.
What else could you do with $2,000?
- You could pay the interest cost on an $80,000 mortgage at 2.5% for a whole year
- Go on short holiday
- Go on three weekends away
- Start an investment portfolio that will grow over time
Step two – decide which debt you want to repay first.
This is a personal choice. As an adviser, I always check in with my clients as to which is going to give them the feel good factor and with it the motivation to keep going. For some, it’s the smallest debt first, repay it in full, get the sugar hit of success and move on to the next one. For other clients it’s hitting the most expensive debt first gives them the feeling of success because they can see how much interest they are saving.
Step three – find out how long it’s going to take to pay it off at the current repayment rate.
If you don’t know, check out this calculator from Moneysmart https://moneysmart.gov.au/credit-cards/credit-card-calculator
Step four – make extra repayments.
Start by making small extra repayments every week or month. The key here is to make the extra repayments automatic. Making it automatic means you don’t have to think about it, you’ve done your bit and now it just happens. your debt is coming down, getting smaller, week after week.
Now it’s rinse and repeat until your debt is gone.
If you find that you’ve got plenty of debt, don’t be too hard on yourself. Buy now pay later and credit cards exist because they are profitable for the lender. They are designed to be easy to get, easy to use and easy to pay back over a long time.
If you find that they don’t work for you, once it’s repaid, cut up the card, cancel your Zip or Afterpay and don’t look back. The key is that you make a start today.
If you’re looking for ways to make the most of your money, great ways to manage your budget, check out the budgeting and cashflow section on Sandringham TV https://www.sandringhamwealth.com.au/sandringham-tv/ or the budgeting guide download on the home page