In this current economic climate, it is pretty easy to understand why many people have to resort to drastic measures such as using credit cards and payday loans. This often results in individuals losing control over their finances very rapidly and spiraling towards personal bankruptcy. The main problem is that banks are allowing young people such as students or even those that have just joined the countries workforce take out credit cards far too easily, without taking into account their personal circumstances. Often introductory credit cards can still offer up to half of someone’s base wage as the limit and they are becoming increasingly easier to increase. This is mainly due to the fact that the banks want you in debt as otherwise, they don’t make any money.
If you are finding that you are struggling with your credit cards you are going to want to take action straight away as by the very nature of how APR works, the debt is going to keep increasing gradually. Start by making sure that you aren’t using anyone else’s money to pay off your debts, this is half the problem. There are far too many people that use one credit card to pay off another. Again this is a vicious circle that is very hard to get out of and it will result in you just digging yourself deeper into your financial crisis hole.
Kevin Donovan from Financial Update suggests quite a few interesting options on how to pay your cards off. Start by making sure that you stop using them unless it’s for the bare essentials. This part is all about discipline, if you have no more going out the only thing you are going to have to pay off is interest. Start by stopping all your direct debits or standing orders from that card that aren’t vital. It is very easy to set these things up and then not realize that you no longer need the service or product that you were paying for, but the money will keep coming out of your account until you stop it.
Next, when you have managed to reach some stability you can start thinking about paying the debt off. Many people suggest the snowball method where you start by paying off the smallest amounts first and then move your way up in order of size; however, I would recommend an alternative. I personally prefer to pay off the cards with the highest interest rates first, in this way you will not find yourself in further debt because you weren’t organized. As the last tip, I recommend that you always have the minimum payment on a card set up so that you don’t have to pay anything in late fees just because you didn’t remember.
Tips to pay off your credit card debt faster
According to the Bankers Association, 40% of the country population do not fully pay their credit card balances each month. When you consider that credit cards are among the most expensive debts, there is a reason to worry.
Credit card: a popular way of payment
Of all traditional payment methods, credit card payments are the fastest growing of all. The Payments Association reports growth of over 7% per year since 2008.
It is easy to understand the popularity of credit cards: they are accepted almost everywhere, the transaction is done in seconds, no need to find a bank machine, fraud protection is offered and most even offer rewards.
However, credit cards also come with caveats: the interest rate is often very high, which quickly drives up the balance if it is not paid in full. In fact, the credit card is probably the best tool available to get into debt! If you are caught with a credit card debt, do not despair, it possible to have a plan to repay it. Here are tips that should help you settle your debts faster:
1. Concentrate on your debts (to the detriment of savings)
Before putting savings aside, prioritize the repayment of your debts. The “return on investment” is much better when you repay your high-interest rate debt than when you put that same money. For example, a debt of $ 1,000 to 20% interest costs $ 200 per year while investment will pay around 5% per year, or $ 50. The choice is clear.
2. Review your budget
When was your last family budget? Take the time to review your income, but especially all your expenses in detail to determine where you can cut. Start with obvious expenses such as restaurants, cell phones, outings, clothes, alcohol, and tobacco. If you cannot cut those expenses further, consider reducing your car payment or housing if possible.
3. Prioritize the repayment of cards with the highest interest rates
When you have money available to repay your debts, start by paying off the most expensive credit card, the one with the highest interest rate. Once this card has been paid in full, you can move to the next, not before. Beware of the temptation to pay the credit card with the smallest balance: this would not be the optimal strategy.
4. Make a balance transfer
You have probably already received promotional offers from credit card companies in the mail that encourage you to transfer the balance of your cards to their home. These promotions usually allow you to get a 0% interest rate for several months.
If you opt for a balance transfer, there is however a very important warning to understand: most of these promotional offers mention (in very fine print) that following the promotional period, if the balance has not been paid in full, interest will apply retroactively from the date of transfer. This means that if you have one dollar left, a mountain of interest will be added to your balance. So make sure you understand all the details of the offer.