How do I escape the cycle of credit card debt and become debt free
Credit card debt can become financially crippling if you only pay the minimum amount due each month and continue to incur more debt. Australians are paying record high interest rates as the large commercial banks have largely failed to pass on the interest savings following the cuts from the Reserve Bank in 2012 and 2013.
The average interest rate for credit cards currently stands at approximately 17% (according to RateCity as at May 2013 and data published by the Australian Securities and Investments Commission estimates that the average credit card debt (per card holder) is currently $4,700 and that debt attracts interest of approximately $807 per annum. It is alarming to learn that if you have a credit card debt of $2,500 and only pay the minimum balance each month, it will take 15 years to repay the debt. (source)
If you feel trapped by credit card debt and want to escape the cycle of debt, read below to learn how you might consider going about this.
Consolidate your credit cards
Consolidating your existing credit cards is a great way to reduce the interest bill if you can find a loan which attracts a lower rate of interest. If you have a good credit history and have a stable income you should be able to find a personal loan which attracts less interest than a credit card. If successful you will be able to roll all of your credit card debt into a personal loan (these are marketed as debt consolidation loans). If you own a house you may be able to redraw funds from your mortgage facility to pay off your credit cards. Most mortgages attract a lower rate of interest compared to credit cards.
For people with a poor credit history, it can often be far more difficult to get a debt consolidation loan or to refinance credit card debt. People with a poor credit history may wish to consider a formal debt solution.
Negotiate an informal arrangement
If you have multiple credit cards, it can become difficult to manage the repayments with different credit card companies. You may try and negotiate an informal arrangement.
The only downsides with an informal arrangement are twofold:
- You can’t force any one creditor to accept your repayment proposal; and
- It is unlikely the credit card companies will reduce or freeze the interest (for any longer than say 3 months under a hardship arrangement), so your debts can spiral out of control if the situation isn’t managed carefully.
Consider a formal arrangement
If you have tried an informal arrangement and it failed or you simply can’t afford to repay your debts, you may wish to consider a formal arrangement with your creditors.
A formal arrangement with your creditors like a Debt Agreement or a Personal Insolvency Agreement will have the benefit of freezing the interest on the credit cards and will allow you to make one regular payment towards all credit cards and any other debt you may have. With a formal arrangement you can also select the frequency of your payments to match your payroll cycle (like weekly, fortnightly or monthly).
Click here to learn more about entering into a formal arrangement with your creditors.