How to escape the debt trap once and for all


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Aussies love their credit cards - at last count there were 16 million credit card accounts with an average debt of about $3000. And of course most people have more than one.

Some pay their card in full each month; others feel their debt will never go away. If you fall into the second group, now is as good a time as any to come up with an action plan to slash your debt.

Whether you owe $3000 on one card or tens of thousands over several, the thought of trying to get out of that debt can seem overwhelming. You just need to take things one step at a time.

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Assess the damage

The first step of course should be to stop spending!

Next you need to work out exactly how bad things are.

Make a list of all your debts. If you only have one credit card it's pretty simple, but if you have several you need to make a list. Include every credit card and store card as well as any personal/car loans.

Write down the outstanding balance, the interest rate and the minimum monthly repayments. Add these all up to figure out the total owing.

If you don't have a budget already you will need to work on one. List your income and all your expenses.

For your debt to have spiralled out of control chances are you have been spending more than you earn. You'll need to look for ways to either boost your income or cut back on spending so that you have money left over each month.

You can then use that extra money to make higher repayments to reduce your debt.

If you have more than one debt a common suggestion is to put your debts in order of interest rate from highest to lowest. The idea is you focus on the debts on the top of the list first. If two have the same rate then make the smaller balance your priority.

You should continue making the minimum repayments on any debts lower on the list. Once you have paid off the first debt you divert the extra money to the next one on the list.

Another option if you have credit card problems is to take up an introductory balance transfer offer with another institution. Common offers are 0% for six months or a low rate like 2% to 3% for a longer period such as one year or even until the debt is paid off. The right one for you depends on how much you owe and what you can afford to pay each month.

When comparing balance transfer offers you need to also consider what the rate reverts to once the promotion period has ended, and the annual fee.

If you have several debts that add up to a substantial sum, consolidation might be an option. This involves rolling over all your debts into a single loan, whether it's a personal loan or your mortgage.

The best thing about consolidating your debt into a personal loan is that you make one repayment each month instead of several. You know that at the end of the loan term the debt will be repaid and out of your hair forever! The disadvantage though is the rate can be quite high - and there is usually an application fee as well as an ongoing fee.

If you own your home, and have equity in your property, rolling over the debt into your mortgage is worth exploring. The biggest plus is that a mortgage is one of the cheapest loans you can get. If you take this route make sure you find out what, if any, fees apply for topping up the loan.

If you have a small debt and the fees are high it might not be worth it. It's also vital to make extra repayments on your home loan to get rid of your debt faster, rather than extending it over the remainder of your loan.

Keep debt under control

We all know that prevention is better than the cure. Once you manage to get out of debt you should do what you can to keep things that way. Of course you could get rid of credit cards altogether, but for some people that might not be practical.

And if you use your credit card the right way, rather than abusing it, it can be a good way to earn reward points. Here are a few tips to manage debt:

  • Don't spend more than you can afford. 
  • Avoid impulse purchases. 
  • Make debt repayments a priority in your budget. Treat it like a bill that has to be paid each month. 
  • Always pay more than the minimum required. 
  • Reduce your credit limit to a small amount so the potential damage is limited.
  • Stay within your credit limit.
  • Don't accept offers to increase your credit limit.

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Effie Zahos is editor-at-large at Canstar and a financial commentator. She is the author of A Real Girl's Guide to Money: From Converse to Louboutins, and a regular money commentator on TV and radio across Australia. In 1999, a background in banking Effie helped kickstart Money, which she edited until 2019. Effie holds a Bachelor's degree in economics.