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9 Steps to pay off credit card debt

woman in jeans with empty pockets because of credit card debt

Credit card debt is scary. 

It’s easy to fall into by accident, and it’s anything but easy to get out of. 

We’d love to sugarcoat it, but paying back credit card debt isn’t a sweet thing. Shaking loose your credit card debt can be time consuming and impact every aspect of your life. That doesn’t mean it’s not worthwhile - in fact, we guarantee that getting free from that credit card debt is worthwhile.

To make that process a little easier, we’ve put together a step-by-step guide to help you with getting out of debt and staying out of debt!

Step 1: Set your goal

The first step of breaking free from credit card debt is working out exactly how much debt you have. 

If you have multiple credit cards, prioritise them in terms of which needs to be paid off first (or consider bringing them together into a debt consolidation loan). 

Then it’s time to set yourself a goal. It can be long term - “I will pay off all of my debt in the next three years” - or short term - “This month I will pay $10 more than the minimum repayment. Next month I will pay $20 more than the minimum repayment.” 

Set a realistic goal that you can stick to to prevent yourself from getting discouraged.

Step 2: Put your credit card away

While you’re focusing on paying off your debt, the last thing you want to do is stack more on top of it.

For the moment, it’s time to take those cards out of your wallet. 

The last thing you want to do while paying down credit cards is build up more debt, so we’d definitely be saving those for when you’ve got things under control.

Step 3: Create a budget

Once you’ve committed to paying down a credit card debt, it’s time to create an airtight budget

Start by working out your monthly income, and then identify all your necessary expenses: rent or home loan repayments, regular bills and utilities, groceries and petrol. Put aside money for these things first - it won’t do you any good to make a big repayment on your credit card, only to find out you haven’t left enough to pay your rent.

Once you get money sorted for the essentials, allocate the rest of your budget to paying down your debt. You might have to tighten your belt when it comes to your social spending, but breaking down debt is all about keeping to the basics.

Step 4: Look for spare funds

Have some extra cash squirrelled away? It might be time to bite the bullet and put it toward getting rid of your lingering debt. 

If you’ve got any money set aside (think gifts, savings, or that little boost from your tax return), it might be time to think about where it could be better used. 

Other ways to consider adding in some extra funds might be selling off some unwanted goods online or adding in some freelance work.

Note: Money in a high interest savings account might stop accruing interest when you take it out to pay off debts, but it could be for the best. If you are earning interest at a rate of 3% but paying interest on credit card debt at 18%, your debt will be climbing faster than your earnings.

Step 5: Notify your credit card provider

If you’re experiencing financial trouble, the best thing you can do is let your credit card company know. 

Most credit card companies will have a system in place for when you're having trouble paying your bill. Ask to speak to either customer service or a hardship officer. Let them know you’re having trouble paying off your balance. They might be able to help by lowering your interest for a period, or waving some late fees to give you some breathing room.

Step 6: Refinance your mortgage

Another option for freeing up some extra funds to go toward your debt is to trim the fat from your home loan. 

Check out Mozo’s best home loan offers on the market, and if you’re paying more than you should be, think about refinancing. If you don’t want to shift your mortgage to a new lender, think about calling your bank and discussing your options. You can also use our handy haggling script.

Put any extra cash straight toward getting rid of that outstanding credit card balance.

Step 7: Pay off one thing at a time

If you’ve got a number of credit cards with balances owing, then there are two popular schools of thought on how to tackle them. Either pay off the one with the highest interest first, or prioritise the one with the smallest balance. 

The first method works because you’ll be getting rid of the debt that will grow the fastest, so you’ll avoid the worst of the snowballing effect. 

Paying off the smallest balance works because you’ll see debt disappearing quicker - which is a great way to keep yourself motivated.

You’re the one who knows your money attitude best, so choose the one that will work for you. 

Step 8: Consolidate your debt

The other option to get rid of multiple credit card balances is to consolidate them all into one easy-to-manage debt. You can do this with a consolidation loan or with a balance transfer credit card offer. 

A consolidation loan might be a good option if you’ve got a very large balance, or if you have multiple credit cards or other debts to pay. 

A balance transfer might be better if you just have one credit card and you’re looking to shake off the high interest, since most balance transfer offers come with a 0% interest period.

Step 9: Have a payment plan

If you opt for a debt consolidation loan, you’ll have a set term and monthly repayments to help you manage paying off your debt. 

Balance transfers on the other hand, come with a low or no interest period attached. 

When that ends, your interest will go back to being higher until you pay your balance off. That’s why you’ll need to have a plan in place for clearing that debt within the time frame.

Make a note of how long you’ll have low or no interest, and then you can use our credit card debt payment calculator to work out if your current budget and payment plan will put you in the clear. 

Example: You have $4,600 in credit card debt, charging interest at 20.99% p.a. There is an interest free period for the first 12 months as a Balance Transfer offer. 

  • Option 1: Make monthly repayments of $200. Your first year will be interest free, but it will take you roughly 2 years and 1 month to pay off the debt, and the total interest will add up to roughly $265 (plus any fees from the card).
  • Option 2: Make monthly repayments of $400. You will pay off the loan within the interest free period of 12 months, and only pay the card fees.

If they don’t have this plan in place and make payments of $200 each month, then they’ll still being paying off their debt when the 0% interest period ends, and so they’ll pay hundreds of dollars more than they would have otherwise.

happy debt free lady with credit card

How to stay out of debt

Once you’ve cleared all that debt, the next step is to stay out of it! 

You didn’t do all that hard work just to find yourself falling back underneath.

Here are some tips on how to make sure you don’t wind up owing money again.

Stick to your budget

After paying off your debt, sticking to a budget should keep things running smoothly for you. You can probably afford to loosen the reins a little, but don’t do away with your newfound money management skills just yet. 

Keeping your budget in place will not only keep you out of debt, but you might even find yourself with a nice savings stash built up instead. Which brings us to the next tip: 

Build an emergency fund

One of the quickest ways to wind up with debt building up is being unprepared for emergencies, and having to put sudden payments on credit cards. 

When your car breaks down, or you get sick, or accidents happen, being able to turn to some kind of savings or emergency fund can help keep you from needing to put that money on a card. 

Think about closing credit card accounts

If you struggle with the temptation to spend, it might be time to close down some of those accounts. Especially if you’ve found yourself with several cards - think  about stripping it back to the basics, and keep yourself limited.

Choose a better credit card for your needs

Of course, cutting credit cards out completely doesn’t have to be the only way. Credit cards can be perfect for convenience, and they can also be a good way to repair any hits that your credit score might have taken (if you commit to staying debt free).

If you aren't ready to swear off them just yet, then think about trading in credit cards with high interest rates or steep annual fees for a better deal. Head over to our credit card switch and save calculator to find a new card that will suit you better.

Alternatively, start comparing with the below table to find a balance transfer credit card offer that might suit you.

Have more credit card questions? Read up on 7 of the most common credit card mistakes and the different types of credit cards. See Mozo’s picks for the best credit cards.

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Sara Borman
Sara Borman
Money writer

Using her Bachelor of Communications in Writing, Sara has spent her professional career creating content and crafting copy. Her writing has been published in academic journals and literary anthologies in the US and Australia. She’s determined to make the world of finance accessible and loves finding a way to make money interesting to the everyday person.

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