Avoiding Credit Card Debt
Credit cards have great utility. Used wisely, credit cards help you accomplish many things, including the very important task of managing your cash flow. Indiscriminately used, credit cards can place you into a debt hole so deep you could get stuck for years.
Debt can have a devastating impact on lives. At its worst, the pressure of debt could expose personal and family relationships to enormous stress. Before that happens, it pays to pause and consider more responsible use of credit cards. Appreciate the advantages that credit cards offer over other payment methods but don’t forget it is still real money so don’t get carried away. Here are some ideas.
• Avoid making minimum payments. Try and pay the balance off in full each month if you can. This is the best way to minimise interest charges. Even if you can’t pay it off in full you should try and pay as much beyond the minimum as you can afford. Credit cards set their minimum payment at only 1.5 to 3 per cent of your outstanding balance. At say 2.5 per cent, this only works out to you needing to pay $25 for each $1000 outstanding. Even if you were repaying with no interest or fees it would still take over three years to pay off the principal balance. When you include interest (average APR is 16 per cent) and fees, why, you would need at least 11 years to clear the $1000 debt. To see exactly how much faster you could reduce your own debts by raising your repayments search online for a ‘debt repayment calculator’ and see how the interest paid drops.
• Arrange for a lower credit limit. The credit limit allowed on credit cards is not meant to be taken as an obligation to spend that much. These invites are like an invite to place yourself into debt, take a stand and call your card issuer and request a lower limit that you know you can control. Set it at a level that you can comfortably repay.
• Avoid making late payments. When the card issuer does not receive your payment on time, they will hit you with late-payment fees on top of extra interest. The expense is totally avoidable on your part. In addition it adds more to the money you owe.
• Pay early. Aside from protecting you against late-payment fees, this works to your benefit if you usually carry a balance. The average daily balance is the most common method used to calculate interest due. Paying early in the month lowers your outstanding balance for more days in the billing cycle which reduces your interest.
• Monitor your spending. Internet banking is now a standard feature with credit cards. You can use these to check how much you have spent during the month and the amount that will be included in your statement for the month. This gives you enough time to prepare for the payment when it comes due.
• Stay away from cash advances. If you are making cash advances from credit cards more frequently, you really need to review your budget. Cash advances are expensive. A transaction fee is levied at the outset, and this can run to 3 per cent of the amount. There is no interest-free period on cash advances and the interest rate is often higher than that for purchases.
• Choose the best credit card for you. Your credit cards should fit your paying behaviour. If you normally pay off your balance in full each month (called a “transactor” in the industry), the interest rate on your credit cards won’t matter at all; instead you’ll want longer interest-free periods and probably a rewards program. If you don’t typically pay your bill in full each month then a card with low interest rates will be the most important. Don’t fool yourself, if you know you always carry a balance then admit it and choose a card that suits that habit.
Manage your credit cards well. They can be very handy tools in achieving some of your goals.
This finance article is by compareyourbank.com.au founder Richard Greenwood which compares cards and products including Reward credit cards. Visitors can compare products side by side and then apply online.