Get rid of bad debt – and we mean credit card debt!
As financial planners, we see lots of people get into trouble with credit cards and the first thing you need to do if you really want to get a grip on your finances is learn to manage your credit cards. Here are our tips:
- Pay it off. It’s probably the highest interest of any loan you have and you’re likely to be paying more interest on your card that you’d be earning in a savings account, so pay it off! If you can’t pay it all off, do whatever you can to make a sizeable dent in it every month, while still leaving yourself enough to live on.
- Stop using them. It’s just so easy to use credit cards to pay for things. Problem is that we often lose track of what we’re spending. So rather than just tapping the plastic and giving it no further thought, set yourself a budget. Figure out how much you need each week, fortnight or month, break it down into what needs to be paid electronically and what can be paid by cash. Look at your “paid electronically” list and see what can be paid by direct debit and set those up to be paid from an account other than your credit card. Look at what can be paid by cash and withdraw that amount of the first day of the week/fortnight/month and use it. Whatever is left that needs to be paid by credit card, make sure it can be paid off monthly so that you’re not growing your debt. If you literally can’t stop using them:
- put them in a plastic container, fill the container with water and put it in the freezer – then you’ll buy yourself some time to think through the purchase before you use them.
- unsubscribe from every sales email you receive. That discount doesn’t look so great when you add on all the interest you’ll be paying.
- set yourself and your family or friends a challenge to go for a month without buying anything new.
- When your cash runs out, stop buying. Sounds simple doesn’t it, but in reality, most people turn to their cards when cash is running low. Rather than turn to your cards, maybe you might need to make your coffee at home, eat noodles, check the back of the pantry for meal ideas or get creative when the cash runs out.
- Build up your savings. Having an emergency fund is a great idea to cover unexpected expenses like car repairs or a dentist bill. Aim to have a month’s wages saved so that you can cover those little (or big) emergencies.
- Paying off debt with debt. It’s an old trap that many fall into when you receive an interest-free or low-interest offer from one of your credit providers. Whilst it may seem like good sense to take up their offer, often when we see the zero balance on the card, it’s a signal to spend again. If you do a transfer balance and have a zero balance card, put it away. Don’t use it. Step away from the credit! And check the fine print. What happens if you don’t pay off the transferred amount by the end of the interest-free period?
- Consolidate. If you have multiple cards, do you need them? Do you need multiple fees? Having one or two for an emergency or holiday might seem like a good idea, but what are they costing you?
It’s just too easy to spend money these days. So make sure you spend wisely and make those credit cards work for you.