Tips on paying off your credit card debt
The lure of the little plastic
Did you know that studies have shown when consumers purchase things with a credit card, they tend to spend more than they would have if they used cash? In fact, simply having the little credit card logo by the front door can increase sales. Even in times of economic prosperity, consumers have had a love-affair with the little credit card, raking up a collective debt in the billions. Now, in the wake of the Global Financial Crisis, more people than ever are struggling to pay off their credit card debt. Don’t be one of them!
Work out how much you owe
You can’t start on the journey of paying off your credit card debt if you don’t even know how much you owe to start with. So the first thing you should do is gather up the latest statements on all your credit cards and figure out how much you owe on each card. Then, rank the credit cards by their interest rate from the highest to the lowest.
Tip #1: You should always start by paying off the credit card with the highest interest rate.
The next step is to figure out how much money you currently have in savings. You should immediately put those savings (with the exception of your emergency fund) towards paying off your credit card debt. While some people would like to point out that savings can earn you money through interest, you would actually save money by paying off your debt first. Credit card interest rates are among the highest that the bank has whereas savings are usually the lowest.
For example, say you had $10,000 in credit card debt and the interest rate on your credit card was 12% p.a. and you also have $5,000 in savings earning you 3% interest p.a. In one month, you now have $100 in credit card interest that you have to pay off whereas your savings only earned you $12.50, meaning you are worse off at the end of the month by $87.50.
However, if you had used your $5,000 and paid half your credit card debt, you would have only be charged with $50 in credit card interest. While a saving of $37.50 doesn’t seem like much, that’s $450 over a year and for people with multiple credit card debts, the savings do add up.
Tip #2: Pay debt now, save later (but leave some funds for emergencies)
Work out a budget and stick to it
Having used your savings to pay off a portion of your credit card debt, the next thing to do is to plan out how much you could afford to pay each month out of your disposable income. To do that, you need to plan a budget and stick to it. First of all, think of all the things you would normally buy in a month, you may need to refer to your past bank statements for an accurate picture. Then classify everything on that list as either a) essential, b) important but not essential and c) other. Eliminate all “others” and seriously think about whether you need all the “important but not essential” items. Before you keep any non-essential items on the list, think to yourself, do I really need this object or do I just want it? Once you have your budget finalized, the most important thing is to stick to it!
Tip #3: Make a budget and stick to it
Of course, all this time while you are paying off your credit card debt, you shouldn’t be using your credit card to rack up more debt. The credit card was what got you into trouble to begin with. Instead, practice paying for things with cash. Studies have shown that compared to swiping a little plastic card, the act of handing over money to salesperson can reduce spending.
Tip #4: Get use to paying for things with cash
There will be hiccups along the way but if you stick to your original intent, you will eventually be able to pay off your credit card debt. But that’s the end of the story! Like dieting or curing alcoholism, the journey to recovery is only half the story. Once you have become credit debt-free, it is important for you to remain so. The last thing you’ll need is to whip out that credit card and go on a spending spree again.
With all your credit cards in your hand, figure out which one has the lowest interest rate. Better yet, look on the market to find the one with the lowest interest rate. Then, keep only that card and cancel all the other ones. You don’t need the extra temptation of having multiple credit cards in your wallet – one is more than enough.
Tip #5: Keep only one credit card (the one with the lowest interest rate)
And tuck that credit card somewhere safe. Don’t use it for everyday purchases (pay by cash instead). The credit card should only be there for emergencies. After all, that was what the credit card was initially invented to do, before consumers overindulged themselves. So pay off your debt, remain debt-free and enjoy living a life without the fear of debt collectors!
Tip #6: Keep the credit card out of your wallet and use it only for emergencies.