Tackling Credit Card Debt
Credit cards can be an excellent way of purchasing goods and
services as they allow you to delay the payment for the purchase by an
extra 50 days or so (interest free period). Unfortunately credit card
offers are rampant and often people take on far more debt than they can
physically make repayments on. This is when stringent control is
required. The good news is that you can take control of your credit card
debt and ensure the debt does not control you. Start to take control
today by following these ten simple steps.
1: Establish a Budget and Sick to It
The first step to establishing some financial control over your
circumstances is to develop a detailed budget.
Start by writing down a list of all your monthly earnings (wages,
investment income, business income etc.). Following this, write a list
of all your regular outgoings such as mortgage or rent payments,
personal loans, council rates, utility, phone and Internet bills, fuel &
vehicle maintenance, insurance, health & groceries. Make sure you
include other aspects of your life such as entertainment, eating out and
clothes shopping.
Once you have these figures you can calculate your monthly cash flow by
adding up your total incomings and subtracting your total outgoings.
Hopefully your earnings will exceed your expenses leaving you with
positive monthly cash flow. However, if you find your expenses exceed
your earnings you have negative cash flow and are pushing yourself
further into debt each month.
Should you find that you are spending more than you are earning, the
only solution is to review your list of expenses and decide what you are
prepared to ‘go without’. Sacrifices will need to be made until you at
least reach a break-even position.
2: Pay off more than the Minimum Balance every month
Credit cards have traditionally required a minimum payment each month
equal to 3 - 4 percent of the credit card balance. These days they can
be as low as 1.5 percent. At that rate it can take years to pay a card
off due to the interest charges if you only pay the minimum due each
month. Pay as much as you can afford each month over the minimum. You
will find your repayments exceed the interest charges and you debt
starts to reduce.
3: Pay the most expensive cards first
If you have a number of credit cards then focus your efforts on
paying off the card with the highest interest rate first. Don't try to
pay a few extra dollars off every card each month, simply pay the
minimum balance on all cards other than the one with the highest
interest. Pay all you can afford off this card until you have paid the
balance off in full. Once this is done you should move onto the card
with the next highest rate of interest and repeat the process.
4: Make several payments a month – do not wait for the bill.
You receive your credit card bill once per month but your interest is
actually calculated daily. You can reduce your interest payments by
making repayments as often as you can afford. For example, if you get
paid weekly and can afford to pay $100 off from each pay cheque, pay
$100 off every week rather than waiting until the bill is due. Over time
this can accumulate to have a big impact by saving several weeks worth
of interest on the money you pay off.
5: Consolidate Credit Card Debt
Consolidation of debt is all about placing all your debt under a single
loan or arrangement. When you have several different credit cards it can
be difficult to manage the debt and remember which cards you have paid
off. Many credit cards have heavy penalties for late payment which will
set you back from reducing your debt. Having all your credit card debt
in one place makes it much simpler to manage and gives you a clearer
picture of your financial situation.
6: Interest Free Balance Transfers
Look into transferring your outstanding credit card balance to a new
credit card. Many credit card companies offer introductory balance
transfer offers such as 0% interest for 6 months. This can be an
effective method if you focus on paying off the debt during the
introductory period. You also need to think about what interest rate the
credit card will default back to after the introductory balance transfer
period ends.
7: Lower Interest Credit Cards
Credit cards have traditionally been an expensive form of debt with
interest rates as high as 18-19%. Increased competition from new
entrants to the market has created a new breed of low interest credit
cards. These cards have ongoing interest rates between 8.99%-12.99%. Low
interest credit cards are helpful if you carry an outstanding balance
from month to month. They tend to have fewer features such as reward
point schemes but could save you hundreds of dollars per year in
interest compared to high interest cards.
8: Informal Payment Arrangement with your card company
If you're having problems paying off your debt you should phone your
credit card company and explain the situation. Many are very supportive
and might arrange special payment terms to help you pay the debt down.
9: Use a Debit Card
If you're struggling to control your spending using a credit card
then you could consider using a debit card for new purchases. A
Mastercard or Visa debit card has similar acceptance to credit card but
is linked directly to your savings account. As a result your spending is
limited to what you have in your bank account and there are no nasty
surprises in the form of a bill each month. You can keep a credit card
for major purchases and your existing debt while you pay that off.
10: Refinance your credit Cards into your Mortgage
If you are a home owner, consider refinancing your credit card debt
into your mortgage. Providing you are diligent and do not repeat the
same mistakes over and over again – there are substantial repayment
savings to be had.
Talk to one of our consultants to decide on the best option for you.
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