How to reduce credit card debt

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With household debt already at record levels, it’s easy to fall behind in credit card payments. And, for some, the tipping point is all too close.

Teacher’s aide and mother of one Natalie Cook, 31, is ready to admit that, until recently, she and her husband Andrew had credit card issues that were threatening their peace of mind and the harmony of their relationship. They needed professional help.

“When you have a problem with money, it’s a disaster,” says Natalie “Last November, I was crying because we didn’t have enough money to pay a bill and I thought, ‘I’m sick of this – we need to get on top of things and we can’t do it by ourselves’. I realised juggling wasn’t working and we needed professional help, so I rang Superwoman [a Sydney-based financial solutions company].”

Living on credit

While Natalie was on maternity leave with son Declan and the family existed on Andrew’s policeman’s income, credit cards became a way to pay the household expenses. “Our credit card debt had gone up to $3,600,” says Natalie. “That may not be a huge amount for some, but it was for us because we’re not on a high income.

So, the cards never got paid off. We’d pay a bit and then spend again and it became a vicious cycle and we were stuck in the trap of relying on credit.

“For us, because our budget was so tight, we were constantly dipping into the maxed-out cards and never making headway. We ran the cards up to the limit quickly and then it was a constant juggle to make the repayments.

“I was really depressed by it. I felt we weren’t getting anywhere or saving or getting out of the hole we’d dug for ourselves. And it caused conflict between Andrew and I.”

Natalie says Superwoman asked her and Andrew to write down everything about their finances. “It was hard to admit to our spending history,” says Natalie. “It was also embarrassing that we had a financial mess when other people managed – I felt like the only woman in Australia who couldn’t get her head around a budget.

“The Superwoman adviser mapped out where our money was going, allocating amounts to life insurance, living expenses, rent and bills. She also got us to record our spending in a diary – we had to be disciplined to stick to it. We found we were overspending on things like takeaway, so now we’re getting into the habit of eating at home.”

The solution

Superwoman told the couple to cut up their credit cards and redirect their saving amount of $480 a month towards repaying the debt. Natalie also returned to full-time work and now brings in $1,000 a fortnight to supplement Andrew’s earnings.

Within six months, they had reduced their credit card debt to just $100.

“We’re about to start contributing to a managed fund as a way of saving for a house deposit,” says Natalie. “In the new budget, there’s an allowance for clothes and shoes – not much, only $80 a month. But we’re lucky in that my family and friends give us things for Declan, which is a great help as he grows out of clothes so quickly.

“Andrew and I still argue about money, but we can see the benefits of sticking to the budget. We’ve even stuck up a picture of our dream house as a reminder of our goal.

“I think credit cards can be useful, but I’ve reduced the limit on one from $2,400 to $1,000 and I’ve cancelled the other. I’ve also learned how to accelerate the repayment process by paying more than the minimum balance and always paying fortnightly,” says Natalie. A debit card, which can be used where credit cards are accepted but draws money directly from your bank account, may be something Natalie would consider in the future.

“Six months ago, I would have felt too embarrassed to talk about any of this,” Natalie says, “but now I feel empowered and more in control. There definitely have been positives that have come from this experience.”

The big picture

For anyone with credit card problems, Superwoman (www.superwoman.com.au) offers the following suggestions:

• Complete a detailed budget to work out where you are spending money and where you can cut back, then each pay period direct any surplus to pay your credit card balances, starting with the card with the highest interest rate. 
•  Cancel credit cards or reduce limits as cards are paid off to reduce the temptation of building up the balances again. 
• You can reduce your debt faster by transferring your current balances to a credit card with a low honeymoon rate or zero-on-balance transfers. But be sure to cancel the cards you have paid out, so you don’t end up with double debt!
• Reduce the number of your credit cards to one and reduce your credit limit to an amount you can afford to pay off completely each month. If possible, consider replacing your credit card with a debit card. 
• Choose a simple credit card with a low interest rate and a low annual fee instead of one with a fancy rewards program (and a higher interest rate and annual fee). 
• If you have equity in your home, consider refinancing your credit card debt into your home loan. You’ll need to be disciplined enough to pay off this portion of the debt
  as quickly as possible and not make just the minimum monthly home loan repayments. Cancel the credit cards that have been paid off. 
• Once you’ve paid off your credit cards completely, stick to your budget and put the money that was going towards credit cards into a savings plan. Once you have saved $300, you can buy the pair of boots you’ve been coveting – you’ll enjoy them much more knowing you earned them and haven’t put yourself in debt to get them.

Financial counselling services

Are you in debt and need financial counselling? The Australian Financial Counselling Credit Reform Association (www.afccra.org) is the peak body for free financial counselling in Australia. Visit the website for links to organisations in each state. And if you are in doubt about what is being reported to banks and other companies regarding your credit rating, contact Baycorp Advantage (www.baycorp.com.au), which can provide you with a credit report for a small fee.
The organisations listed below offer advice and support, or can refer you to financial counsellors in your area.

Victoria

• Financial & Consumer Rights Council (referral to financial counsellor): (03) 9663 2000.
• Credit Helpline (telephone advice on credit): (03) 9602 3800 or 1800 803 800.
  New South Wales
• Credit Helpline (telephone advice on debt/credit, referral to financial counsellor): 1800 808 488.
• Consumer Credit Legal Centre: (02) 9212 4111.
• Financial Counsellors Association of NSW (referral to financial counsellor): 0500 888 079.
  ACT
• Care Financial Counselling & Consumer Law Centre of ACT: (02) 6257 1788.

South Australia

• Adelaide Central Mission: (08) 8202 5180.
• Northern Community Legal Service: (08) 8281 6911.

Tasmania

• Anglicare Financial Counselling: 1800 243 232.
• Consumer Credit Helpline, Hobart Community Legal Service: (03) 6223 2500 or 1800 232 500.

Queensland

• Financial Counselling Services Queensland: (07) 3257 1957.
  

Northern Territory

• Anglicare Northern Territory Financial Counselling Service: (08) 8948 2700 or 1800 898 500.

Western Australia

• Financial Counsellors Resource Project (referral to financial counsellor): (08) 9221 9411.
• Consumer Credit Legal Service: (08) 9221 7066.
• Financial Counsellors Association of WA: (08) 9325 1617.

Words: Julianne Dowling. Photography: Scott Hawkins. Hair & make-up: David Novak-Piper.