Mar 16, 2018
Our Insights ...
As we told you in Part 1, credit card debt is nasty. Not only is the debt money you owe, but the longer the balance sits there, the more interest it incurs and the more you’ll have to pay. It’s a vicious cycle, but fortunately, there is a way out.
Try these steps for freeing your life of credit card debt.
Stop using your card
Put your card where can’t reach it. Out of sight, out of mind, as they say. You don’t want it as a payment option the next time you’re out grocery shopping. Stop using it to stop incurring debt.
Create a budget and stick to it
Budgeting is about more than just thinking about how much you want to spend on things. You have to actually allocate the income you do have and determine how to make the best use of it.
When you budget, make sure to set aside a specific amount each month or week to put towards paying off your credit card debt. Living on a budget will also help wean you off credit card dependency and accruing more debt.
Make direct debit payments
If possible, set up your bank account to make automatic credit card payments with each salary payment. This way, you’ll get the payment out of the way before you conveniently forget or run out of money to make the scheduled payment.
Pay more than the minimum due
You may think you’re doing pretty good if you remember to make your minimum payment each month. But in reality, that minimum mainly covers interest charges and just barely chips away at your balance.
It can take you years to pay off debt if you make only the minimum payment due. Additionally, you’ll pay out thousands in interest charges along the way.
Aim to pay more than the suggested minimum amount due.
Set a goal to make a payment each month or even each week that exceeds the required amount.
Say, for example, you have a minimum payment of $50 a month. Can you afford $200 per month, instead? If you pay $50 each week towards your card rather than just once in the month, you’ll simultaneously knock away your outstanding balance and reduce what you owe in interest.
Put extra cash towards debt
Extra cash can come in the form of a gift, reward or tax return. If you come into some unexpected money, you may be tempted to treat yourself.
But why not use those funds instead to cancel out or reduce any credit card debt you have? Remember: the sooner you can pay off your card, the more you’ll save that would have gone towards interest payments.
The real reward will come when you can keep your hard-earned money in your pocket rather than putting it towards interest owed on your credit card.
Focus on one card at a time
If you’re making only the minimum payment for several cards at once, then you won’t make much headway.
Focus on one card and get it out of the way. You may choose to first get rid of the one with the smallest balance because it’s easy to clear. Or you may go the route of first tackling the account with the highest interest rate since the longer you maintain that balance the more money you’ll lose to interest.
The main goal is to have a systematic plan for paying off credit card debt so that you make steady progress.
Carefully consider a balance transfer
You may have the option of transferring your current balance to a new card with a lower interest rate. But be careful - you probably have a limited time period to take advantage of the low interest.
If you don’t pay attention and pay off that balance in time, you could wind up with even higher interest rates than what you had before.
Additionally, the special low interest rate may not apply to new purchases, so make sure you read the fine print before using a card with a transferred balance.
Loan Consolidation
Loan consolidation may be right for you if you owe a lot of debt spread across several credit cards. Consolidating will put all of your debt in one place and make it easier to tackle with a strategic payment plan.
Keeping a Card? Lock It Up
There are many factors to consider when deciding whether to cut up your card or not.
But if you are going to keep your card, you must set some rules. Keep a low credit limit of an amount that’s easy to repay in a few months. Use your card only for emergencies such as when travelling abroad and your bank card doesn’t work. Most importantly, just keep your card where you can’t reach it for unnecessary day-to-day expenses.
Need some more advice on getting rid of credit card debt?
For smart financial strategies and more tips about debt reduction, talk to the team at Calder Wealth Management. Call us on (08) 8373 3333 to schedule your appointment.
Written by Ben Calder, Private Client Adviser at Calder Wealth Management.
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