Five strategies to cut debt

Trouble paying off your credit card? Nicole Pedersen-McKinnon explains how to make progress.

A fair chunk of the nearly $50 billion the Australian Retailers Association forecast we would spend at the shops over the Christmas break typically goes through credit cards. Reserve Bank of Australia data show the average monthly credit card spend in 2015 was $1559, but in December that jumped 11 per cent to $1725.

What’s more, a finder.com.au survey has found more than a one in three cardholders (35 per cent) aren’t expected to pay their credit card bills in time – it’ll roughly take them more than five months to repay the balance.

Is it any surprise that “reduce debt” is the top financial resolution? (Or that the average financial resolution is kept for an average of 93 days?)

Here are five strategies to actually achieve that goal in 2017.

Strategy 1: Use debit not credit

Your first priority is to ensure you don’t get yourself in even more debt.

So, if you’re likely to succumb, make like a lot of people and remove the temptation to do so. In November 2016, 75,000 credit card accounts were closed, while 284,000 debit cards were opened, according to RBA data.

The benefit, of course, is that you can only spend up to the limit of the money you actually have in your account.

Strategy 2: Transfer your balance

With any outstanding debt on your existing cards, look at taking up a 0 per cent balance transfer deal.

Such deals let you transfer a balance and pay no interest on that balance for a period of, say, 18 months. There is a serious sting in the tail, though: new spending is charged at an eye-watering rate and the so-called revert rate at the end of the balance transfer period will be sky-high.

So stick it in the drawer (or in a bowl of water in the freezer) and move heaven and earth to clear your balance while that’s free.

Strategy 3: Mobilise your savings

If you have a mortgage and hold savings elsewhere, stop. Any money you have lying around – and I mean for holidays, emergencies, whatever – should be held in an offset account attached to your mortgage.

By keeping it there you’ll earn an effective return equal to your mortgage interest rate; your savings are offset against the balance of your loan so if you have, for example, a $100,000 mortgage with $10,000 in your offset account, you’ll only pay interest on $90,000.

Also consider getting your salary paid into an offset account and using a credit card for your monthly expenses, shifting the money across only when your repayment is due.

This way you can reduce your debt for up to 55 days. Your savings are of course tax-free – and you’ll repay your debt far quicker because more of your repayments will chip away at your ‘principal’ or your loan balance.

Strategy 4: Get the discount you deserve

Official interest rates may well start going up towards the end of this year – the Trump factor is making that a surer bet.

In addition, money market nervousness is causing lenders to increase mortgage rates ‘out-of-cycle’. It all means you need to make sure you are on the very best deal.

Remember, customers with a professional package, for which you will pay an annual fee, will qualify for a discount from the advertised mortgage variable rates.

It’s worth checking if you have the full discount for which you qualify – the savings from even 0.25 percentage points off will mount to $500 this year (on a $300,000 mortgage that drops from 4.5 per cent to 4.25 per cent). It can’t hurt to ask!

Strategy 5: Deploy your savings on debt

Use any savings from the above to ditch your debt. Don’t stop there, though. I guarantee there’ll be plenty more money you can squeeze out of your other financial contracts to speed up the process – once more, without having to cut back on your spending.

Companies in the utility, insurance and telco space routinely rely on the inertia of old customers to fund tremendous discounts given to new ones. Research the current best deals with a quick comparison site check or Google search and, if your provider won’t match it, switch yourself. Say you can find an extra $500 a month.

Throw that onto your $300,000 loan (at 4.25 per cent) and you’ll discharge your debt nine years earlier and $70,000 cheaper.

Now that makes for a great 2017.

Nicole Pedersen-McKinnon is a money educator and TV finance commentator who presents Smart Money Start, fun financial literacy, in high schools around Australia. www.themoneymentorway.com