For the first time since March 2014 I have a zero dollar balance on all three of my credit cards (Yes, three 😦 That’s not a typo!). Each time I breathe out there is a part of me that realises it’s finally happened. I’m not yet debt free, but I owe credit card debt no more.
For the past two years I’ve owed between $500 and $5000 but that’s finally a thing of the past. Us Aussies as a nation seem to be fairly fond of credit card debt. In fact, we owe in excess of $51 billion of which, interest is due on over $34 billion! This equates to $5.4 bln in interest charges p.a. The average credit card holder owes $4380.90.
If you asked me why I own three credit cards, I couldn’t really give you a good answer. I think I popped my credit cherry with a $1500 limit for convenience sake and to use as a buffer for unforeseen expenses when I moved interstate for the first time. The second one ($2500 limit) came along when I had maxed out the first and suddenly had professional and university fees due. The third I applied for because of the rewards on offer. It came with $2900 limit and I thought I could be cleaver and pay it off in full every month, acquiring points to be used on airline flights along the way. As an aside, according to one report, only about one-third of Aussies think they pay interest on their credit card however, the Reserve Bank estimates its more like two-thirds! Looks like I sat squarely in the majority!
Quick caveat: If you can at all avoid them, I think it’s best to have zero credit card debt available, yet to have a reserve and emergency fund to cover unforeseen expenses. But since most of the developed world have access to credit, I’ll share a bit about how I paid off my credit cards below.
How to approach credit card debt repayment
Whilst the debt-snowball method is a popular approach, it wasn’t one I used. I simply paid off a set amount each month that was well above the minimum repayment. At times this meant some fairly aggressive actions (usually $200 but up to $600 per month). After setting aside regular savings for my emergency fund and upcoming expenses, I’d use all surplus cash to reduce the debt outstanding. This worked well but as soon as the debt appeared manageable, say around $1000, I’d make another impulse purchase. It seems I’ve yo-yo’d like this for the last two years. It wasn’t until I started tracking my ongoing credit card debts month-by-month that I realised what I was doing and that I had to change my approach. I started side-hustling and funnelled this surplus income into debt repayments. Finally, I sold un-needed belongings (i.e. a bike, bed-frame and laptop) online and payed out the last $353 this afternoon.
The three keys for me have been to:
- track my total credit card debt,
- cease using my credit cards whilst re-paying debt and (this is maybe the most important)
- earn extra income or sell unused belongings to increase repayments
This isn’t to say other methods don’t, or won’t work. Indeed, they may be superior to my approach. I think the debt-snowball is particularly effective if you have overwhelming debts or a large number of credit cards. I liked the approaches of Leo Babauta and J.D. Roth too.
An important aside, you can often speak with your bank about financial hardship, following which they may reduce or waive your interest payments for a period of time. I certainly don’t believe in paying off only the minimum balance, but I do think paying off debt whilst still saving a modest amount into an emergency fund is important.
Where to from here?
It seems absurd to me that I could go into $6,900 of extra debt overnight simply by maxing my exisiting cards out! (chills!) So why not cancel them all? Actually, this is something I’m still considering. Keeping $1-2k available on credit seems prudent for any emergency expense I can’t cover with my emergency fund (currently at $6,000) so for now I plan to keep at least one – but – while I save toward $10,000 in my emergency fund I won’t use credit and instead will continue paying into a separate savings account that I can draw down on as if it were a credit card (a kind of reserve fund I think of as a reverse credit card). When I draw down on this fund, I’ll pay back into it as if it were a credit card until it returns to a zero dollar balance (e.g. at $2,000). This is in addition to the emergency fund, which isn’t for anything other than a genuine emergency.
The task at hand now is to build up that emergency fund and to leave my credit cards untouched!
For extra credit: An excellent article on why most people don’t repay debt in the financially most optimal rate was presented on Scientific American in Feb 2016; if you’ve got any debt owing whatsoever, it’s well worth a read.
Have a comment? I’d love to hear your debt reduction strategies too!
Disclaimer: This post is for informational purposes only. Please seek personal and professional financial advice, particularly if you’re experiencing financial hardship.