How to Pay Off Credit Card Debt (with an Average Salary)

"Credit card debt is a rip-off. I've written about it in the media (see this Stuff.co.nz article from November 2021), but getting rid of the debt can be tough without a plan of action. I want to make it easy and let people know that they can get debt-free without a windfall or a pay rise. You can be an average earner and sink the iceberg of debt you have amassed.

Right now, New Zealanders are spending record amounts on credit cards despite COVID restrictions. However, credit card interest rates charged by banks and other lenders hurt the vulnerable with 20%+ p.a. costs. The best time to repay this debt is today.

"Credit cards are money machines for banks and are incredibly profitable. However, the debt they create can haunt people for years. I believe the only sustainable way to pay off a credit card is to consider credit card debt's psychological, mathematical, and pragmatic aspects. It takes more than paying off 5% of a credit card's closing balance each month to clear the balance.

Most New Zealanders, at least in the short term, can't change their salary. But they can change how they spend their money – and that's what I want to make clear by publishing this guide.

It doesn't matter how you built up the debt – what matters is how you get rid of it. Unfortunately, New Zealand is an expensive place to live, and the stress and guilt of carrying around credit card debt aren't worth the energy. However, the only person that can help is yourself, and it's not an impossible task to pay off credit cards".

To get rid of credit card debt, you need to become very familiar and comfortably with your money. The more you know (and the more fears you're prepared to overcome), the better you can get control of your finances.

Here's what to do:

1. First, list your bank balance, income (after-tax, per month), rent or mortgage (per month) – these are the essentials.
2. Then, add up your total credit card debt. It could be over one, two or more cards and can include store cards (like the Q Card etc.) and long-term finance cards like the GEM Visa. Next, list the annual interest rate on each credit card (it will usually be somewhere between 15% and 26% p.a.).
3. Lastly, add up your ongoing expenses, including Car, Insurance, Finance repayments (if applicable) and a Phone plan etc. Don't look at general spending (food, clothing and entertainment) as these will be adjusted as you repay debt.

Once you know these amounts, you know how much you have to pay back and what your essential outgoings are. Then comes the fun part - getting a budgeting app. Our guide has a shortlist of the most popular apps used in New Zealand, and to speed things up, we suggest considering mybudgetpal, which is a free app, or Pocket Smith (a paid service). 

The time you spend setting up the app is an investment and will create a valuable asset on your road to financial recovery and wellbeing. Budget apps let you track every dollar you spend, which forces you to become aware (and then relive) exactly where your money goes. 

Top tips:

1. Each app has reporting functions – run monthly reports so you can visualise where your money went.
2. Understand when direct debits and bills are due, and start preparing for that. The best approach is to look at your last two months bank statements (so you have 90%+ of expenses, although it may still miss annual payments such as insurance etc.) and mark down the dates bills are charged. You can then budget for what's due and have less fear about getting into overdraft.
   
3. Predicting your spending means you won't worry if your bank account gets down to $100 as you know your bills are paid and salary is coming in three days, etc. This will reduce stress and lead to more informed financial decisions. 

"Repaying credit card debt is only going to happen if you commit to cutting costs. But, unfortunately, many people are reluctant to change their ways, which keeps them in the debt trap as they don't have any spare money to pay off the debt.

You'll be able to make serious inroads into your debt by changing how you do things. Remember, credit card companies and banks want you to remain in debt, which makes them a lot of money. By reducing your costs, all the spare money you save can go towards the debt balance. It's up to you to make this happen - the more obsessed with costs you become, the faster you'll be debt-free.

It does require you to make a significant mindset change. This will be unusual at first, but your commitment to cut costs and switch providers will prove to be invaluable as you can now decide where and how to spend your money".

Before you start repaying your credit card debts, it's important to put together some framework. We suggest the following:

1. Put together an emergency fund.
Creating a small but reliable savings account is essential to avoid the need to rely on expensive credit. $1,000 is a good amount and likely to be a fraction of your total credit card debt. This emergency fund is for absolute emergencies, not ongoing costs like presents, entertainment and ongoing car-related costs. By keeping it essential-only, there's a reduced risk of it being spent on temptations. Our guide to emergency funds has more details.

2. Create a budget that you can stick to
The best starting point is working out what you want to repay on your credit card every month. Our suggestion is the following:

1. 1/12th of the balance per month if you have an interest-free balance transfer deal
2. 1/10th of the balance per month if you are still paying interest
   
3. Know this: If you think you can make higher repayments, then you can choose 1/8, 1/6 or something else, and reduce your debt repayment journey.
   

For example, if your debt balance is $10,000, we suggest considering paying around $834 a month or $1,000 a month, depending on your credit card interest costs. 

These numbers will sound high, especially if you've been used to paying the standard 3% to 5% minimum repayments (as outlined here). However, this amount means you can seriously start to shake off the debt. The alternative is paying the minimum balance and $50 here, $100 there etc., which won't make much progress. To be debt-free, you have to be aggressive. 

3. Make the repayments and budget your lifestyle around those set outflows
Once you know how much debt you have to repay per month, the next step is to work out what you can spent outside of essentials (see step 4. below). When you have less to spend, it's easy to determine where you find value and happiness and where you see money wasted. Every other dollar can then be happily applied to clearing your debt.

As the months go on, it's likely that paying 1/10th of your debt every month won't always be achievable. That's perfectly normal – the good news is that you will make progress each month as long as you make a repayment. All that matters is that you regularly set aside money to bring the balance down month after month.

Have a repayment goal and keep the momentum going
We believe it's possible to repay a $5,000 to $10,000 balance as an average earner in 12 months. The bigger the debt, the less "fun" you're likely to have. But it's essential to have some "fun" money to enjoy life; otherwise, the lifestyle change will likely be too unnatural and hinder your debt repayments. Suggestions for low-cost entertainment include:

1. Dinners and drinks at home with friends (instead of going out)
2. Free TV streaming (instead of paid subscriptions)
3. Board games or going to local nature trails (instead of paid outdoor activities or in-app purchases)

 
The important thing is to keep the repayment momentum going. There's no point paying off $3,000 (on a $5,000 balance) only to blow out again and end up where you started. Repaying credit card debt is a psychological challenge that needs willpower and discipline. However, despite the pain points, the freedom that comes when you become debt-free is priceless. 

Generally, the journey is as follows:
The Beginning – You hit the ground running, cutting down costs and challenging your everyday spending. You get familiar with your spending (looking at bank statements online and/or using a money/budgeting app), cut up your old card, apply for a balance transfer (or keep the debt with the card) and focus on aggressive repayments. 

In the first 1-3 months, you manage to make some serious contributions towards your credit card debt. After that, you carry on doing the same, finding that spending less doesn't cause you to be any less happy. On the contrary, you may notice that you're a lot happier without the stresses of regular shopping and general consumption. 

The Middle – You continue to enjoy hitting the debt repayment milestones. You may miss some repayments as some months will be better than others, but overall the debt continues to drop. Your focus is on continuing to eliminate expenses by using a budget app and exploring your bank transaction history list. The more you understand your money, the less of it you'll use unwisely. 

The End – Eventually, you'll make your last repayment. It will have taken self-control and the willingness to miss out on some minor social events. However, being debt-free is an invaluable feeling. You'll also have a new set of budgeting skills, a new philosophy as to how to spend money, and, most importantly, a new perspective on what you value. This will set you up to be careful with your financial decisions and avoid your past mistakes.

"You can achieve being debt-free. Getting into debt is easy; paying it off will be incredibly satisfying. Every week, we hear of many New Zealanders committing to live a 'financially aware' life and cutting up the cards that hurt them the most.

There's a lot of support around to help you repay the debt. If you need someone to hold your hand and get you sorted, you won't regret the help. I suggest looking at FinCap, which offers hundreds of free-to-use financial mentors around New Zealand. I also hear great things about Christians Against Poverty which has a proven track record in getting people sorted.

Whatever you decide and however you get there, paying off credit card debt is a feeling so positive you'll have wished you did it sooner. No one even regretted becoming debt free".