Today, instant gratification is a way of life. Credit cards make it so easy to have that great thing right now. Credit cards are convenient and necessary; more so if you pay them off each month. If you can’t pay them off and your debt keeps rising, you pretty much sacrifice your Financial Freedom to the credit card company. Most of us have a few credit card debts and it can be hard to know which ones to prioritise. Credit card debt is a form of slavery and this article will show you the best way out!

The core strategy is like a simple life philosophy; pay off thousands of dollars, one dollar at a time. Here’s how to pay off your credit card debt in 4 steps:

Step 1

List all your debts. Record the name of the lender, the amount you owe, the interest rate and the minimum monthly payment. This will give clarity and perspective to your credit card debt situation.

Don’t beat yourself up about how you got here, just focus on what your future looks like without the debt. Make the minimum payments each month on or before the day they are due. This saves you paying late fees and penalty interest rates.

Step 2

Stop making it worse. Remove your credit cards from your wallet and put them somewhere you can’t reach them - easily. Look at your budget and work out how much extra you can allocate to repaying your credit card debts. The Debt Elimination Calculator will help work out how much you need and how long it will take.

Step 3

Work out which debt to pay the money against first. This is where it gets interesting. Humans have a natural sense for fairness.  So, left to our own devices we want to pay equal amounts off each debt until the debts are all gone, or we lose our motivation. But if your goal is to be debt free, this may not be the best answer.

An actuary or accountant would tell you the obvious answer is to prioritise the card with the highest interest rate, pay it until its gone, then start paying down the card with the next highest interest rate, and so on until they’re all paid.

This may seem like a good theory, but it doesn’t seem to play out so well in practice. That’s because human nature needs to experience a sense of growth and contribution to stay at something. So this only works for the very disciplined among us who will just keep going until the job is finished. Finishing something that feels thankless is the hard part. So what should you do?

Step 4

Pay off a small debt first. This type of achievement triggers the release of a brain chemical called Dopamine. Dopamine is responsible for feelings of achievement and can therefore be quite addictive. That’s why ‘To Do’ lists work so well. Use this to your advantage; now you know you can, and you feel good about it. Keep the momentum going for your larger debts. 

Start with your smallest debt, pay it until it’s gone, move on to the next biggest, and so on.

It’s proven time and time again that mere mortals are better at achieving goals if they are broken down into a series of smaller ones. The quick win is a good win approach.

There is yet another advantage to this approach. As the smaller debts are being paid off, you can take the money you previously applied to those minimum payments, and put it towards paying off your other debts faster (if you keep the total payments the same every month). So when you get around to your bigger debts, you have more cash to apply to them.

This approach is referred to as the Debt Snowball. Two exceptions to this rule:

  • If there are extremes among your debts. For example if you had one loan that had a very high interest rate compared to the others, then it might make sense to go after this one first before applying the Snowball approach to the others. This is rarely the case as most credit cards tend to have rates between 14% and 20%.
  • You have a debt that particularly bothers you (maybe from your parents?). These loans may not carry financial interest, but they can interfere with relationships. Sometimes you just need them gone.

If you are sure you have the discipline and motivation, then try the Actuary’s option of highest interest rate first. You can always nab a bit of extra motivation when needed by hitting a really small one first :)

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Vince Scully

Life Sherpa®

With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Before creating Life Sherpa®, Vince founded the Calliva Group; a fund manager, product issuer, adviser and lender. Vince is an adviser to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie Bank’s infrastructure team.

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