Many would-be homebuyers are excited to take the first step towards their Great Australian Dream only to be hindered with a big hurdle: managing their existing credit card debt.
Applying for a home loan is a commitment that takes years, decades even, and it is a great move to start it with a clean slate. Here are the steps that can help you manage your existing credit card debt and pay them off before applying for a home loan.
Step 1: Make a list of your existing debts and set a goal
It is crucial that you get a clear picture of how much debt you are actually in before making your next move. This is particularly true to those borrowers with multiple credit cards. You have to make a list of all your credit cards and sort them according to their outstanding balances and interest charges.
Once you have an idea of how much debt you are dealing with, the next thing to do is to set a timeframe. How long are you planning to pay for them? Set a reasonable deadline that will not necessarily make you financially worse off. It is also crucial to know that your credit card payments affect your credit score.
Step 2: Choose which credit card to pay first
You need to make sure that you are always meeting the minimum repayments on all your credit cards. However, if you have spare funds and you are not sure which ones you should prioritise, you need to consider your cards’ outstanding balances and the interest charges.
If you choose to pay extra to your card with the highest rate, you will prevent yourself from incurring more interest charges. You can also shorten how much time it takes to pay that particular card.
However, it is also practical to deal with the card with the lowest outstanding balance first. Finishing off one credit card will give you a sense of progress, allowing you to focus on your remaining debt.
Step 3: Minimise the usage of your credit cards
This is an essential step in getting rid of your existing debt. You have to guarantee that you will cut back on your credit card usage. As much as possible, use only one credit card and use it only when needed. The key here is to prevent your debt pool from growing again.
If you do not use cash and want to charge your day-to-day expenses on your card, try to use a debit or cash card instead. This will help you develop discipline in spending.
Other strategies in paying off your credit card
You can employ other strategies to make sure that you stick to your goal of paying off all your credit card debt.
One way is to set up automated payments. Your bank can set this up for you. Having an automated mode of payment will ensure that you meet your dues on time.
Another strategy is by consolidating your credit card balances into a single loan. The most common way to do this is by getting a personal loan and using the amount to pay off all your debt.
You can also consider opening a balance transfer credit card. You can ask your bank about this as they can allow you to pay for your all your debt interest-free for a certain period.
It is always good to communicate with your bank to explore your options when paying off your credit card debt. Alternatively, you can also reach out to a financial expert that can help you sort out your finances before you apply for a home loan.