How to become debt free: 8 tips to boost your finances

Editor-at-Large · 4 March 2021
There’s no way to sugarcoat this. If you have debt – and I’m talking about bad debt – you’re living beyond your means. If you have debt you just can’t get rid of, it needs to be your number one priority. It won’t necessarily be easy, as you may have to change some of your behaviours, but until you get that pesky monkey off your back, it’s very hard to move forward.

Here are some tips to help you become debt free.

1. Stop using your credit card

The first step to taking control of your debt is to stop unnecessary spending. Don’t use your credit card any more, and stop using buy now pay later (BNPL) services. If you don’t have the cash to pay for something, then the answer is pretty simple – don’t buy it!

2. Make a list of your debts

Make a list of any debts you have including credit cards, store cards, outstanding BNPL debts, and personal loans.

Next to each debt make a note of the following: the outstanding balance, the interest rate being charged and the minimum monthly repayment. Add everything up to see how much you owe in total.

3. Work out how much you can put towards your debt each month

Go through all your expenses with a fine-tooth comb and figure out what you can delete or what you may be able to get a better deal on. This may include your home loan, car insurance, home insurance and energy plans, as well as your mobile and internet.

I would suggest trying to live on a bare-bones budget for a while and direct any extra money towards paying down those debts. This involves cutting out all non-essential spending, such as takeaway meals, entertainment services, personal care items such as manicures, and any recreational activities. When you reach your goal, you can start adding in some nice-to-haves.

Become debt free
Source: NeatBones/

I know that might sound tough, but it will help you clear your debt much quicker. If you don’t think you can stick to that, then at the very least limit the amount of money you spend on wants, such as pedicures or takeaway meals, so that you still have a decent chunk of cash to put towards paying down debt.

Ask yourself if there is anything you can sell, and use the proceeds to put towards your debt. And if money comes your way, such as a tax refund, then put that straight towards paying off your credit card or wider debts.

4. Keep some money aside for emergencies

It’s a good idea to put at least $1,000 aside for any unexpected expenses. That way if something crops up, such as car repairs, you won’t have to resort to putting the expenses on your credit card.

5. Talk to your lenders

It could also be a good idea to talk to any lenders to see if you can negotiate a better rate on your existing debts. Be upfront and let them know that you are experiencing some financial difficulty, and ask what they may be able to do to help you out, such as reducing any interest rates even if it’s for a short period of time.

6. Weigh up different debt repayment options

When it comes to paying down multiple debts, there are a number of different approaches you can take. Let’s look at the main options.

Snowball method

With the snowball method, you pay off your debt in order from smallest to largest. So, you only make the minimum repayments on the larger debts and put all your extra cash into the smallest debt. When you pay off the first debt you move onto the second smallest debt until that is paid off. You continue in this way until all debts on your list have been cleared.

You may find there’s a psychological benefit to using the snowball method because you’ll feel a sense of achievement when you pay off a debt – and this will happen quite quickly if you focus on the smaller debt first.

Snowball method
Source: Alexandr Jitarev/

Avalanche method

With the avalanche method, your priority is to pay off the debt with the highest interest rate first (rather than the smallest dollar amount) and then move down the list by interest rate until all your debt is cleared. So, you make the minimum repayments on any debts with lower rates and pull all your surplus money towards the debt with the highest rate.

While the snowball and avalanche methods may seem similar from a numbers point of view, chances are the avalanche method will give you the better result.

Take out a balance transfer

Balance transfer credit card offers are commonplace these days. The idea is you get a special rate for a limited period if you transfer your debt from a different institution. The most common offer is 0% for six months, but you may be able to get a low rate, or even 0%, for an extended period.

Some of the things to ask include:

  • What does the rate revert to once the introductory period is over?
  • What is the annual fee? A high fee could eat into any interest savings you make.
  • Is there a balance transfer fee? Some institutions charge a percentage of the balance, and this could really eat into any savings. If you paid a 2% fee on a $5,000 balance, that adds up to $100.

To work out what balance transfer deal might be best for you, consider how large your balance is, how much you can afford to pay off each month and how likely you are to stick to this. If you have a large balance and your repayments will be on the lower end, then the revert rate will be especially important, as that’s the rate of interest you’ll be paying on the leftover balance.

Consolidate your debt into a personal loan

Another option worth looking into is consolidating all your outstanding debts into a personal loan. The advantage of a personal loan is that you only have to worry about making a single repayment each month. You’ll be forced to make repayments each month, and at the end of the loan term the debt will be gone.

If you take this option, make sure you look for a personal loan with a competitive rate and fees. I’d suggest taking out the loan for the shortest term you can afford the repayments on. Or if you want a buffer, take out a loan with a longer term, but make higher repayments to clear it faster.

Consolidate your debt into your home loan

You could also look into consolidating all your debt into your mortgage. You will need to have enough equity in your home, though, to be able to do this.

The risk of this approach is that if you stick to just making the minimum home loan repayments, you are essentially extending your loan and will pay more interest over the long run. If you use your home loan, it’s important to make extra repayments to reduce the debt faster, if you can.

debt repayment
Source: Iryna Gyrych/

It’s also worth asking if any top-up fees apply and, if so, what they are. If you have a small debt, then it might not be worth it.

The right option for you will depend on the amount of debt you have, the interest you’re paying and how much you can afford to repay.

7. Get help if you need it

If it all feels like it’s too much and you need some extra help, then it’s a good idea to talk to a financial counsellor. A good place to start is the National Debt Helpline (NDH). You can visit the website or call 1800 007 007.

8. Change your behaviour for good

After you have done all the hard work to ditch your debt, the last thing you want to do is end up back in the same situation. I would get rid of the credit card altogether – or at the very least only keep one with a small limit so that you don’t land yourself in trouble – and consider cancelling any BNPL accounts to avoid the temptation to overspend.

Here are some other tips to help you stop whacking things on credit:

  • Set up your own BNPL account within your existing bank account. Put, say, $1,000 in your account and only use this account to shop. When you buy something, pay yourself back in four equal instalments. Chances are when you’ve saved up the cash and you’re staring at it, you may not tap into it as much.
  • Wait before you buy something. If you see something you want, don’t buy it straightaway. Give yourself some breathing space – it might be two days or a week. If you still want it after waiting, go ahead and buy it if you can afford to.
  • Calculate how many hours you’ll have to work to pay for an item to find out if it’s worth it for you. Let’s say you are paid $30 an hour and want a $400 set of headphones. That works out to be a little more than 13 hours of work. Do you still want those headphones?
  • Find a buddy who’s in a similar situation and make an agreement to keep each other accountable. If you’re tempted to make a big purchase, talk to them first.

This is an edited extract from Ditch the Debt and Get Rich (Are Media Books, RRP $29.99), exclusive to Canstar, and republished with permission.

Main image source: Teerasan Phutthigorn/

This article was reviewed by our Sub Editor Jacqueline Belesky before it was published as part of our fact-checking process.

Effie Zahos

Canstar’s Editor-at-Large, Effie Zahos, has more than two decades of experience helping Aussies make the most of their money. Prior to joining Canstar, Effie was the editor of Money Magazine, having helped establish it in 1999. She is an author and one of Australia’s leading personal finance commentators, appearing regularly on TV and radio.


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