How to get out of credit card debt

Step 1: stop the balance growing

Nothing below works while new spending lands on the same card. Take the cards out of your wallet and out of your saved payment details, and use a debit card for everyday spending.

Interest accrues daily on the balance outstanding, so new purchases raise the base every subsequent day's interest is charged on. Adding $200 a month to a card you are trying to clear cancels most of a $250 repayment.

Step 2: get the numbers on one page

For each card: balance, annual purchase rate, cash advance rate, minimum repayment, statement date, annual fee. Most people have never seen these together, and doing so usually shows one card doing far more damage than its balance suggests.

Then find the figure everything depends on: what you can pay in total each month, without fail. Not your best month — the number you can hold through a bad one.

Step 3: see where the current path leads

Put a balance, its rate and your current repayment into the credit card interest calculator, with the repayment set to the minimum.

The answer — often more than a decade, and more interest than the original debt — is what the minimum repayment is designed to produce. Your statement carries a warning saying the same thing.

Step 4: fix the repayment, then pick an order

Set your total monthly repayment at the figure from step 2 and hold it there as balances fall.

This is the biggest lever available and it costs nothing. Minimum repayments shrink as the debt shrinks; if your payment shrinks with them, the last third takes years. Holding it flat means each cleared card frees its repayment for the next.

Then choose which card gets everything above the minimums — see snowball vs avalanche, and run both orderings on your figures with the debt payoff calculator.

Step 5: check whether a transfer or consolidation helps

A balance transfer card moves the debt to a promotional low or 0% rate for a set period, usually with a transfer fee.

Before committing:

• Divide the balance by the number of promotional months. If that monthly figure is unaffordable, you will still owe when the rate reverts.
• Check the revert rate. On Australian cards this is often the cash advance rate, not the purchase rate.
• Do not spend on the new card. Purchases attract the standard rate, and payment allocation may not clear them first.
• Keep making at least the minimum — missing one can end the promotion.

A personal loan replacing several card balances gives you one repayment, a fixed end date and usually a lower rate. Compare on the comparison rate, and use the APR calculator to see the cost on your actual amount rather than the standard example.

If the minimums are already unaffordable

Ask for hardship assistance before missing a repayment. Australian credit providers have obligations to consider hardship requests. Options can include reduced repayments, a repayment pause, or reduced interest for a period. Making the request is free and asking does not itself damage your credit file.

Get free financial counselling. The National Debt Helpline provides it at no cost, nationwide. Financial counsellors are independent of your lenders and can negotiate on your behalf.

Be careful with commercial firms. Debt agreement administrators and "debt management" companies charge fees for services that financial counsellors provide free, and a debt agreement is a formal insolvency arrangement with lasting consequences for your credit file. Get free advice before signing anything.

If a provider will not help, the Australian Financial Complaints Authority handles complaints about hardship decisions free of charge.

Afterwards

Think about whether to keep the cards. Two competing considerations:

• Keeping them open preserves your total credit limit, which helps credit utilisation.
• Unused limits count against your borrowing capacity on a home loan application.

If a mortgage is on the horizon, reduce or close the limits. If it is not, keeping a card open with a low limit and clearing it monthly is reasonable.

Then redirect the repayment into a starter emergency fund. The usual reason people end up back in card debt is that the next unexpected expense had nowhere else to go.