Here's how to get rid of your credit card debt

Thursday, 20 September 2018

The key to getting out of credit card debt is to act early, before it gets out of hand.

My credit card is out of control. Should I get a personal loan to pay it off, or extend my mortgage?

If you are having trouble paying your credit card off in full each month, you need to take action.

Credit card interest rates are usually about 20 per cent a year, so it does not take long for a balance to become a big problem.

There are a few ways to tackle this.

* A $10,000 credit card limit drops your mortgage borrowing potential by $47,000

* Budget Buster: Seven steps to kill your credit card bill**

You could get a personal loan and use it to pay off your card. This sets a timeframe on your payments. You know that, if you sign up for a two-year loan, your debt will be gone at the end of that time. You don't risk redrawing the money again, as you might if you were just trying to pay it off via your card.

Take action to stop credit card debt getting out of control.

The biggest problem with a personal loan is that you are not necessarily going to save a lot in interest payments.

Unsecured personal loans range from about 14 per cent to 20 per cent with most banks.

You could opt for a peer-to-peer lender such as Harmoney, but they allocate interest rate according to risk, and if you've got out-of-control credit card debt, you might be seen as high-risk.

You could also switch to a low-interest rate credit card, such as the ASB Visa Light or BNZ Low Rate Mastercard. There are a lot of options in the market - make sure you're not paying a higher annual fee to achieve that lower rate.

If you have a mortgage, you could extend that to pay off your card. This gives you a cheaper interest rate but there's a risk that you spend the rest of the life of your loan paying it back, costing you more in the long run.

Take care with debt consolidation loans for this reason, too. Having just the one payment is easier to manage, but often they will extend the term of the loan, reducing monthly payments but adding overall cost.

The best option might be to take out a new card with a balance transfer deal, if you qualify.

This will allow you a period of time when no interest will be charged, to pay down the balance as fast as you can. If you can't get rid of the whole debt within that period, you can transfer again to another bank.

Whatever you do, make sure that once you're out of credit card debt, you don't fall back in.

Reduce your credit card limit to an amount you can comfortably pay off each month or cancel your cards completely.

Do you have a consumer or personal finance question? Email susan.edmunds@stuff.co.nz