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How to cut that credit card debt

Christopher Walsh Founder of MoneyHub.co.nz

Iopen a lot of emails about credit card debt holding New Zealanders back. While it’s uncertain how effective new credit legislation will be, the national credit card debt balance grows by the day.

Many people stuck in a debt trap don’t think they’ll ever be able to pay off their credit card. Many others are confused about why the minimum payment they make doesn’t ever seem to bring the balance down.

I know for certain that you can repay a $5000 or even a $10,000 credit card debt on an average salary.

However, how fast you can do it depends on how much you’re prepared to sacrifice. Unfortunately, there is no fast lane on the road to debt repayment – but the destination is happiness.

Going debt-free – what you need to do

MoneyHub recently published a detailed guide of everything you need to know, and I summarise below the best must-know tips.

My goal is to help any of the hundreds of thousands of New Zealanders carrying consumer debt that seems impossible to repay.

Step 1 – know that it’s possible with an average income

Right now, the average New Zealand salary is around $56,000. The monthly after-tax salary is around $3800 (excluding any KiwiSaver, student loan and child support contributions, etc).

If you have a credit card debt of $5000, and you want to repay it over 12 months, you’ll need to put $417 per month ($5000 over 12 months) towards your credit card bill, assuming there is no interest being charged on the balance (more on that below).

It might seem like a lot of money per month, but broken down, that $417 is around $100 a week or $14 a day. That’s arguably easy to isolate and put aside. You can’t change your rent or mortgage, car costs and other essentials, but you can leave behind costs that don’t bring happiness.

It’s easy to save $14. I remember bringing lunch to work – it was a $3 or $4 of great home-made food versus $10 or $15 of food bought elsewhere. The savings added up quickly. Giving up one takeaway coffee ($5) quickly gets you to around $14 a day if you’re used to buying out every day.

Step 2 – get your eyes over where your money goes

Not knowing how you spend your money is bad news. I suggest you log in and get two months’ worth of bank transactions and credit card purchases. This will give you about 90 per cent of the picture (as annual payments will be excluded). Then, I suggest going through it line by line and challenging every purchase. It may be uncomfortable, but you can’t diagnose something without identifying the symptoms.

Many New Zealanders want to bury their head in the sand and ignore where their money goes. I am sure such behaviour correlates highly with debt and misery. The good news is that I see more and more New Zealanders using budgeting apps – the apps are visual, instant, many of them are free and they help you direct money to what you value.

Step 3 – cut more costs as you grow happier with spending less

You’re unlikely to cut down costs all at once. But as you get comfortable with spending less and repaying your credit card debt, you’ll want to save more. Big-ticket items include insurance, broadband, phone plans and power. Best of all, there are many online resources to help you save money (Consumer being a trusted source for many).

Step 4 – consider a balance transfer credit card

Credit card interest is savage. So if you want to pay off your debts faster, it may be an idea to apply for a balance transfer credit card. By doing so, you will be able to reduce your 20 per cent + p.a. interest rate to around 0 per cent to 2 per cent a year. This means the money that you save will be spent on your debt, not on repaying interest costs.

Step 5 – Help is all around

If you need some help, the best time to ask is right now.

First, I’d suggest contacting FinCap New Zealand and Christians Against Poverty, both free services that hold your hand and get you on track. They’re experienced, eager to help and want you to be debt-free, so there are no downsides. I would also suggest looking at The Happy Saver.

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2021-11-27T08:00:00.0000000Z

2021-11-27T08:00:00.0000000Z

https://stuff.pressreader.com/article/282183654322112

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