Credit card debt 101: the ultimate guide to avoiding unhealthy debt

The whole point of a credit card is that you initially use someone else’s money to pay for the products and services you need. So, every time you buy something with a credit card, you create debt for yourself.

But not all debt is created equal. There’s credit card debt you can manage responsibly and repay at any time, and then there’s debt that continues to build and spiral out of control, causing stress and anxiety.

This easy-to-follow guide could help you avoid the latter. The tips we’ve provided below are general and do not take into account your financial circumstances. If you’re struggling with credit card debt or need more personalised advice, you’ll find information below about where you may be able to get further assistance.

There are some simple steps you can take to try avoid getting into debt with your credit card.

Every time you buy something with your credit card, you take on some debt. If your card doesn’t offer an interest-free period, you’ll be charged interest from the day each purchase is made until it’s repaid. If it does offer an interest-free period, you’ll be charged interest from your payment due date if you don’t repay what you owe in full by the due date.

So, making your repayments on time will reduce the amount of interest you have to pay. Plus, it may improve your credit score, which could help you get a credit card or other type of loan in the future.

Regardless of the kind of card you have, if you don’t make your minimum repayments by the due date, you’ll likely be charged a late fee.

So, if you want to avoid unhealthy credit card debt, making your mandatory repayments on time can be a great first step.

If you’re having trouble affording your repayments, you may need to reduce your discretionary spending (buying ‘nice to haves’). In this situation you should always contact your lender to let them know. They may be able to help by offering things like a repayment plan to help you get back on track.

If you find yourself paying late accidentally, rather than because you can’t afford to make a payment, you may find it helpful to set up a payment reminder in your calendar. If you have regular expenses of a set price, you might even consider setting up an automatic direct deposit from your everyday transaction account to your credit card account.

Whenever you only make the minimum repayment, you leave a credit card balance that attracts interest charges. And if you continue to make only the minimum repayments, there’s a risk you could be paying interest for years before you finally pay off your debt in full.

Repaying as much of your debt as possible as often as you can will reduce your interest charges and the size of the debt. And that in turn will make it easier for you to repay your debt sooner.

If you have multiple credit card accounts, you might be paying multiple account fees, and you’ll probably find it harder to keep track of all your due dates and minimum repayments. A single credit card with a credit limit equal to the sum of several cards with lower limits could be cheaper overall.

By paying off all but one of your cards, you could save a lot of money, but we get that it’s not always as simple as that. Many people find it helps if they:

• Make the minimum repayments on all their cards, so they’re not charged any late fees; and
• Use all their spare cash to make repayments from either the card with the highest interest rate (to reduce interest charges) or the card with the smallest debt (because paying off one card can provide motivation and encouragement that makes it easier to pay off subsequent cards)

Just be sure to consider closing each account or cancelling each card when you’ve paid it in full, so you don’t pay any unnecessary account fees or get tempted to take on more debt by continuing to use the card(s).

Consolidating debt is similar to the above strategy, and is also useful because it can reduce account fees and limit accidental late payments. The difference is that when you consolidate your debt, you take on new debt to pay off your other debts in full.

While it’s a good idea to get financial advice specific to your circumstances, some of the options to consolidate debt may include:

• Use an existing credit card to pay off all your other cards and then close those other accounts
• Apply for a new balance transfer credit card and transfer the balance from your existing card to the new one
• Apply for one of a variety of debt consolidation personal loans and use that to pay off your credit cards

It’s probably not a good idea to take out a cash advance to repay a credit card, as most cards charge extra fees for cash advances.

From time to time, you may see special balance transfer deals that could help you consolidate your debt and get a lower interest rate. Just be aware, some credit cards and loans charge higher rates after the introductory balance transfer deals, so they can end up being more expensive than your average credit card in the long run if you can’t repay your entire debt before the end of the introductory period. So, while a credit card balance transfer could help you get out of debt, it might also create more debt if you’re not careful.

Once again, be sure to close each account or cancel each card when you’ve paid it in full, so you don’t pay any unnecessary account fees or get tempted to continue using the card(s).

The temptation to spend excess credit can be overwhelming. So, as soon as you’ve repaid some of your debt, consider asking your lender to reduce your credit limit. The only reason that request might be denied is if you try to reduce your limit to below the lender’s minimum credit limit for the card.

Don’t worry, if you want to buy something special in the future or if an unexpected emergency pops up and you need a higher credit limit again, you could always consider applying to see if you can increase your limit when you’re ready.

If you didn’t spend time comparing credit cards before you applied for your current one, there’s a good chance you missed out on a better deal. If you did do a good comparison and chose a great deal for you at the time, there may now be better deals that weren’t available when you applied for your card. So it can be worth shopping around and seeing if you can find something more affordable or more suitable than your current card. Our credit card comparison page should be able to help you with that.

Just be aware, a better deal doesn’t necessarily mean the same thing for all of us. For example, you might want a lower interest rate because you usually can’t repay your debt in full straight away. Or you might want better rewards because they help you save money on your standard expenses, leaving you with more cash to repay your credit.