How to improve your credit score by reducing credit card debt
Credit card debt is a $32 billion problem for Australians.1 That's right, we collectively owe the equivalent of $4,200 per person on our credit cards, with the average card holder paying $700 a year in interest, according to the Australian Securities and Investments Commission (ASIC).2
Accumulating large amounts of credit card debt, and not repaying it, can contribute to bad credit history, which in turn can contribute to making you a less attractive candidate for a loan in the eyes of lenders. We examine some strategies to reduce your credit card debt to help you get your credit score in good shape.
Strategy #1: Stop adding to the debt
You won't reduce credit card debt by accumulating more of it! Don't apply for any more credit cards, lower your limits and focus instead on minimising the debts you currently have, with the end goal of paying them off completely. Meet the minimum monthly repayments so your repayment history shows you are up to date and you don’t end up with a default on your credit report, and if you can, pay back more than the minimum to reduce the debts faster. You can use free tools available on ASIC's MoneySmart website to help you out.
Strategy #2: Reduce the number of cards you have
Paying off one piece of plastic can be hard enough, but paying off several at the same time can seem like an impossible task. You may have only a small amount owing on each one, but it all adds up. One of the best ways to reduce your credit card debt is to reduce the number of credit cards you have in your wallet. One way you could do this is by getting a balance transfer credit card with a lower interest rate, and transferring your debts across to that one card for the duration of the balance transfer period.3
Srategy #3: Cut up those cards
When you do pay off one of your credit cards, it can be tempting to reward yourself by spending again. Don't succumb to temptation - as soon as you've paid off an account, close it and cut up that card (perhaps keeping one for your petrol and groceries that you know you can keep a handle on). If you don't do this, ASIC warns you may be up for ongoing fees,4 even if you're no longer using the account to make purchases.
Close your accounts and cut up those cards as soon as you pay off the debt, to avoid temptation!
Strategy #4: Set small, achievable goals
This is a great strategy to pay off multiple credit cards at once. Pick the card with the smallest amount of debt owing on it, and pay that off first. Because it won't take you as long, you'll get a small boost of satisfaction that will keep you motivated to pay off the rest. Start small, and work your way up to the cards with the larger debts.
Strategy #5: Swap your credit for debit
During 2016, 30 per cent of consumer transactions in Australia were made with debit cards5 - significantly more than those made with credit cards. Jump on the debit card bandwagon! While you might wish to keep one credit card for emergency purposes or for everyday purchases you know you can pay back on time, a debit card is usually linked to your savings account and prevents you accruing debt as you'll only be using money you have.
Following these tips can help you reduce your credit card debt and potentially minimise the chances of loan rejection due to a poor credit score. Start getting on top of your credit health today!
Struggling with debt? ASIC MoneySmart has more information about managing debt.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.
1 Australian Securities and Investments Commission. Credit Card Debt Clock. Accessed October 2017.
2 Australian Securities and Investments Commission. Credit Card Debt Clock. Accessed October 2017.
3 Australian Securities and Investments Commission. How to pay off multiple credit cards. Accessed October 2017.
4 Australian Securities and Investments Commission. How to pay off multiple credit cards. Accessed October 2017.
5 Reserve Bank of Australia. How Australians Pay: Evidence from the 2016 Consumer Payments Survey. Accessed October 2017, page 2.