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How to pay off a 0% purchase rate credit card in the New Year

Made use of a 0% purchase rate credit card during the Christmas holiday season? Follow these steps to pay off the balance before the interest kicks in.

Made use of a 0% purchase rate credit card during the Christmas holiday season? Follow these steps to pay off the balance before the interest kicks in.

A 0% purchase rate credit card allows you to put all your seasonal spending on plastic without paying interest during the introductory period. But if you’re carrying a bloated balance at the start of the year, there’s a risk that you’ll also end up paying a lot of interest when the honeymoon period ends.

This guide looks at how you can pay off your New Year credit card debt as quickly as possible so that you can make the most of the 0% interest period and keep your card working for you.

5 steps to pay off your New Year credit card debt

Rather than taking five months (or more) to pay off your New Year debt, you can make it a priority by following these simple steps to help you avoid interest charges when the 0% period on your card ends.

1. Avoid making purchases on the card

While it could be tempting to put more on plastic when you have a 0% purchase rate offer, the priority should now be to pay off what you’ve already spent. This will help you to reduce your debt and increase your chances of clearing the balance before the standard purchase rate kicks in.

If there are items that you have to buy at the start of the year, consider using cash or savings instead of your credit card. Remember that while it may be convenient while there’s still 0% interest available, the bigger your balance gets, the harder it will be to pay off before you are charged interest.

2. Check your balance

The next step is to look at exactly how much you owe on your credit card. Keep in mind that it could take a while for all the transactions to show up on your account, especially with so many public holidays through the December and January period.

This makes it important to look at your “available balance”, rather than what your statement says is owed. Alternatively, you could call your provider and ask them to tell you how much has been charged to your account to date so that you know exactly what you need to pay back.

3. Find out when the 0% interest offer ends

A 0% purchase rate could last anywhere from 3 to 15 months from when you activate the card. It’s essential that you know exactly when this introductory period ends so that you can aim to pay off your balance in full within this timeframe.

You can find out the length of your introductory period by looking at the initial offer and the date you applied for the card, or by contacting your provider directly. When you know the end date, it’s a good idea to set a reminder or mark it on your calendar so that you can keep track of this deadline.

4. Calculate how much you need to pay to avoid interest

You can divide the total you owe by the amount of time left of the 0% interest period to get an idea of what you would need to pay each month to clear the balance before interest is charged.

As an example, let’s say you got your credit card on 1 December 2016 and had 0% interest for 3 months. That would give you until 1 March 2017 to pay off the balance before interest charges applied.

If you had a balance of $1,000 on 1 January 2017, you would have 2 months left to pay it off. That means you’d have to make repayments of $500 per month for January and February to avoid interest charges.

5. Set up a payment plan

Once you know how much you need to repay each month to clear the balance in full before the end of the introductory period, you can set up a payment plan for your card. This is particularly useful if you have a longer 0% purchase rate offer (say 6-15 months) because it will help you stick to your goal.

You can opt to set up auto-payments on your credit card account for a specific amount of money, or you can manually transfer the payment each time you get paid. As long as you’re consistent, you should be able to get rid of your holiday debt by the time your introductory period ends.

A man pointing to credit card interest

What if I can’t pay off my balance before the 0% interest period ends?

Any balance that remains at the end of the introductory period will attract interest at the standard variable rate for that card. For example, if you owed $1,000 on a card with a standard purchase rate of 19.99% p.a., you would pay around $16.60 in interest for the first statement after the introductory period ended.

If you only made minimum repayments of 2.5% on this balance, you would pay around $191 over the course of a year. Worse still, it would take you 14 years and 8 months to clear the debt and it would cost you a total of around $1,463 in interest charges.

While these scenarios highlight the importance of paying off your credit card debt as quickly as possible, sometimes it’s not realistic to try to clear your balance by the end of the honeymoon period. If that’s the case, you may want to consider the following strategies:

  • Adjust repayments to factor in the interest charges. If you know that you’ll have debt remaining when the 0% purchase rate offer expires, you could aim to pay slightly more each month to offset the cost of the interest charges. In the scenario above, for instance, you could add an extra $16.60 per month to your repayments. If you did that, it would only take you 2 years and 8 months to pay off the balance in full, and save you $1,174 in interest charges.
  • Use savings to reduce the balance. If your regular income isn’t enough to pay off your credit card debt before the 0% period ends, you could consider using your savings to clear the balance. For example, say you still owed $1,000 on your card and you decided to pay it off with savings. This would leave you with no money owing on your credit card. You could then put the money you’d usually use for credit card repayments towards your savings balance, allowing you to rebuild it while also avoiding additional fees from credit card interest charges.
  • Apply to move the debt to a balance transfer credit card. Another option you may want to consider is moving your existing debt to a card that offers an introductory low or 0% interest rate for balance transfers. This could be useful if you know it will take you months to pay off the total owed, but it will mean that you need to apply and be approved for a new card. Carefully consider if that’s something that you want to do and keep in mind that frequent credit card applications can have a negative impact on your credit score. However, if you do decide to go ahead with this option, the result could be an extra 3-15 months of 0% interest on your balance.

interest-tax

What else do I need to consider?

If you’re gearing up to pay off a 0% purchase rate credit card in the New Year – or any credit card for that matter – looking at the following factors will help to keep you on track.

  • Standard purchase rate. Even if you have months left of your 0% interest offer, it’s important to pay attention to the standard variable purchase rate for your card. This is the interest rate that will apply when the introductory period ends and it should definitely be considered when planning your repayments.
  • Balance transfers. If you’ve also used the credit card for a balance transfer, you will need to consider both introductory offers when planning for repayments. Keep in mind that both the honeymoon periods and the standard rates could be very different for purchases and balance transfers. Ideally, you should aim to pay off all your debt before the first honeymoon period ends so that you can avoid any interest charges on your account.
  • Cash advances. Cash advance transactions, such as withdrawing money from an ATM or buying gift cards, are not eligible for 0% purchase rate offers. So if you’ve used your credit card for cash advances over the Christmas holiday period, you’ll be paying interest on them at the cash advance rate for your card. Make sure you consider this when working out repayments and aim to clear the cash advance charges as quickly as possible to reduce your interest costs.
  • Late payments. With so much going on in December and January, it’s easy to forget to make a payment by the due date on your credit card statement. The public holidays around this time also mean that even if you pay on time, it could take longer to be processed. These factors mean that there is a greater chance of your payment being recorded as late, which could attract penalty fees and a black mark on your credit file. To avoid this situation, pay extra attention to when payments are due and aim to transfer the money several days in advance to account for slower processing times.
  • Additional fees. From annual fees to cash advance charges and foreign transaction fees from online shopping, there are all kinds of charges that could be added to your credit card balance at this time of year. Being aware of these possible costs will help you to keep your balance in check and make it easier to pay off your card while the 0% interest rate is still in effect.
  • Other debts or expenses. While it’s ideal to pay off a 0% purchase rate credit card before interest is applied, remember to take stock of your other financial commitments as well. If you know you’ll have to spend a lot more money in January, for example, you may want to factor that into your budget. The same applies to existing debts that are attracting interest. How you prioritise these commitments is up to you, but you may find it helpful to start the year with a fresh budget plan that factors it all in.

A 0% purchase rate credit card can be a useful tool for spending around December and the New Year, but the value you get out of it really depends on how and when you pay it off. The steps we’ve outlined here, and the other key details provided, should give you all the tools you need for a repayment plan that makes the most of the 0% interest period based on your circumstances and needs.

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Images: Shutterstock.

Amy Bradney-George

Amy is a Senior Writer at finder.com.au with more than 10 years experience covering credit cards, personal finance and various lifestyle topics. When she’s not sharing her knowledge on money matters, Amy spends her time as an actress.

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