Credit card debt sucks, but it doesn't have to stick around
When used responsibly, credit cards can be a great way to temporarily increase your spending power, rack up rewards, gain access to exclusive benefits and conveniently pay for everyday purchases. However, when those purchases start to add up to more than you can repay, the burden of compound interest can become overwhelming.
Here are five tips to help you get out of debt faster:
1. Make a commitment - frugal is the new black
First things first, make a commitment to paying off your card(s). This will mean a few sacrifices and becoming the embodiment of frugal. Tighten the belt. It may mean a few months of saying no to a night out, or dinner plans, but in the end you won’t be burdened by always having a credit card debt hanging over your head.
2. Come up with a budget - plan, save, repay, repeat
Once you have an idea of how much your credit card repayments are going to be each month, it’s time to come up with a budget.
While you’re in ‘credit card debt reduction mode’, your discretionary income should be mainly used to pay down the balance of your card(s). That’s not to say you shouldn’t keep a few dollars aside (after you pay your bills and buy the necessities) for yourself, but remember what we said about becoming the embodiment of frugal? Any spare cash you have on hand should go towards your cards. The more you pay off your credit card(s) now, the less you will have to pay later.
3. Empty your savings - say sayonara to your 'rainy day' funds
Following on from the last point, apply all your extra cash to the cards. This includes any money you have in savings accounts.
Rule of thumb: you will pay more on credit card interest repayments than the return you get from any savings account in the market. So it’s logical to move the cash from your savings and dump it on your card.
It might be a good idea to leave a little in your savings account for an emergency, you don’t want to have to use the card(s) again if you can help it. But be prepared to say sayonara to the cash you had sitting around for a ‘rainy day’ or a holiday.
4. Pay off bills one at a time - start high then go low
This tip applies to people who have more than one credit card with a balance on it. It’s safe to assume that there’s a few people in this situation out there. To attack your credit card debt, pay the balance which attracts the highest rate of interest first, this balance will cost you the most in interest repayments - makes sense, right?
While you’re working at paying this balance down, make the minimum repayments on the other balances. When you’ve paid down the first debt, then move onto the balance which attracts the next highest rate of interest and so on.
5. Consider a balance transfer - don't give the bank more of your money
Once you’ve made a commitment to paying down the balance of your card(s), it’s time to organise your finances. A balance transfer is a great way to cut down the extra cash you have to fork out each month in interest repayments. There are some great offers out there at the moment, so take advantage of them. This will mean opening up a new credit card with a new bank, but there’s no loyalty in banking anymore, right?
To give you an idea of the type of cash a balance transfer can save you, if you’re currently getting charged 20% on a $5,000 balance, transferring this debt over to a card with a 0% for 12 months balance transfer promotional offer will save you approximately $800. This is money you would have had to pay to the bank in interest.
You can compare balance transfer credit cards in the table below.
Following these simple tips can help you get out of your financial rut in almost no time. Just remember to stick to your budget and your commitment to being debt free.