How to be card smart

How to be card smart

Credit cards - they’re super convenient but it’s also all too easy to rack up a big bill. If that’s happened to you and you’re stressed about how you’re going to pay it back, you need a strategy.

Here are six pointers that should not only help you pay back your bill, but also change your money habits so you don’t end up in the same situation again.

1. Put your credit card on ice
Before you can shrink your debt, you need to stop it growing. That means no more purchases on your card.

Difficult as it may seem, you need to start living out of your current account. In other words - only spending money you actually have.

Making this change is crucial to your success - for two reasons. One - credit card debt is difficult to control anyway due to the high rates of interest charged on it. If you’re adding new spending, the debt can easily spiral out of control.

And two: forcing yourself to live out of your current account will help you break the bad habit of relying on credit to pay for everyday things. This will really pay off in the long run.

2. Get the interest rate down
The reason credit card debt is so difficult to escape from is that the interest rates are so high - usually around 20%. You want your repayments to pay back the debt, not just cover the interest.

There are two options that can help cut down the interest you’re paying:

  • balance transfer, or
  • personal loan

With a balance transfer, you take out another credit card, transfer the balance on your old credit card to the new card, and close your old credit card account.

Make sure the new card has an interest-free period for balance transfers of at least 6 months or preferably 12, so you can concentrate on paying back the debt without having to pay interest.

Be aware that any purchases on the new card will attract the usual interest rates - so it’s very important not to start spending on the new card. And make sure you close down the previous card account so you’re not tempted to keep using it.

If you get to the end of your interest-free period and you have debt remaining, don’t be afraid to transfer the remaining balance again.

If you opt for a personal loan, you will still pay interest on your debt but hopefully at a much reduced rate. A personal loan can be a good choice if you have debt across multiple credit or store cards. You’ll have only one monthly payment to manage, and because it isn’t a credit card, you can’t run up any more debt. Again - make sure you shut down those old cards!

3. Pay off as much as you can afford
Set yourself a budget for absolute essentials - and allocate any money remaining to paying off your debt.

If you’ve gone for a balance transfer, make sure you always pay significantly more than the minimum payment, or you won’t make any progress on reducing your debt.

4. Use your savings, if you have any
Is it a good idea to use your savings to repay your credit card debt? In a word, yes. The interest rate you’re making on your savings is probably far lower than the interest rate you’re paying on your credit card.

Use your savings to repay your credit card and you can save yourself a heap of interest, which can only improve your financial wellbeing.

5. Pay your bill by direct debit
Once you’ve decided how much you can afford to pay off each month, set up a direct debit for that amount. This commits you to paying that amount, whatever else happens.

The great thing about paying your credit card bill by direct debit is that you can’t forget to pay - so you won’t incur any penalties for missing a payment. Missing payments can also damage your credit rating.

6. Change your spending habits for good
Now you have a strategy in place to repay your debt, it’s time to reflect on how you accumulated the debt in the first place. What changes could you make to ensure you don’t end up back where you started?

Take some time to review the items on your credit card bill. For each item, think about whether you really needed it. And if you did, how else could you have paid for it?

Any changes you make to your spending habits now will make a real difference to your financial wellbeing for years to come.

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