The debt owing on your credit cards may be costing a lot more than you expected. But there are ways to save money and fix this by paying it off quickly.
I pay as much as possible on my credit cards for two good reasons. The first reason is that I earn 1% cash back on every transaction that I make, and the second is that I make sure that I am able to pay off the total amount owing each month.
But if this wasn’t the case, particularly when I cannot pay off what is owed, I would stay away from using a credit card on most occasions (there are a few exceptions). Misusing a credit card along with the debts that accumulate may be costing you a lot of money.
Below are five tips on how to pay off credit card debt. This applies to whether you are mismanaging the repayments or when you are struggling with debt that has become unmanageable.
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Pay Your Credit Cards Off Using Your Savings
Did you know that you are most likely being charged about 19% interest on all the shopping you do with a credit card? In some cases, this interest could even be higher. So if you have £500 owing on your credit card, that would add on close to £8 in just the first month.
But when you have that money in a savings account, even the “best buy” current account which gives you 2.02% a year will only allow you to earn 84p in that same month.
This means if you decided to rather pay the card off as opposed to keeping money in your savings account, you would be saving £7.16 every month, or £85.92 in a year. And the savings would be even higher if you have bigger debts.
It makes sense to have emergency cash on hand when you need it, but when you already have credit cards available, consider these cards as a backup and rather pay off the debt.
Transfer It To A 0% Card
The zero-percent balance transfer cards allow for a way to move your debt on your credit card to another one and it won’t charge you interest over a set period.
This is an alternative if you cannot settle what is owed straight away. It will also give you a bit more time to clear what is owed on the card.
Make sure that you work out how much you will need to pay into the card each month before the 0% period expires.
Some of these 0% cards give you up to two years, which makes it even more likely to pay off your debt without having to pay any transfer fees.
Pay More Into Your 0% Balance Transfer Credit Cards
It is interesting that most people are not aware that just sticking to a minimum payment on a credit card is actually not a good thing. It makes sense that you need to make the minimum payment every month to prevent additional fees, but this isn’t the best method to pay off a credit card.
In most cases, the minimum payment is equal to a set percentage of your debt. So as the debt comes down the minimum payment required also gets smaller. This usually means that it takes a very long time to settle the debt. For instance, if you have a £500 debt (at 19%) it would take you almost 18 years to pay off the debt and it would cost you £842 in interest (based on making the minimum payment of 2% every month).
You should rather pay more. In this way you will lower the interest you would have paid and clear your card faster. For example, if you start paying £25 every month, you would clear the £500 within 2 years and it would only cost you £95. That would also mean you would save more than £700.
To see how much you can save on your debts there are different calculators you could use, such as the one from Money Saving Expert.
Set Up Direct Debit Orders
Even though I always try to pay my cards off in full, I did forget to post a cheque once (this was a few years back). If I had not called the provider of the card on the day that the payment was due this missed payment would have impacted my credit report negatively and I would have been charged a penalty.
To prevent this from happening again, I made sure to set up direct debit orders to make sure these payments go through on time every month. However, you still need to ensure you have sufficient funds in your account, or you could be liable for overdraft charges.
Get A Long-Term, Low-Rate Card
If you have more than one credit card or large debts, or your credit rating does not allow you to get one of the 0% cards, you may want to consolidate all your cards and pay a lower interest rate every month.
This could work out to be a dramatic reduction of 5% or 6% from the current rate that you are paying.
For instance, if you have a debt of £500 at 6%, and you are paying £25 each month towards the debt, this would end up costing you £27 in interest. This works out to £68 less than it would if you had kept the debt on your 19% interest card.
