Let me say right from the start that this is not a credit card company bashing article, however, it has to be said that many people in the western world are struggling with credit card debt to a degree that some have taken their own lives or become bankrupts. It does not have to be that way and credit cards do not need to be the enemy.
Credit cards can be extremely useful weapons in your financial armoury, used sensibly and correctly they can actually save you money. The added insurances and benefits gained from using a credit card on large purchases such as holidays and furniture or vehicles can be worth a lot. In this respect paying for a holiday (for instance) on a credit card that offers holiday insurance and cancellation insurance for holidays paid for on the card can save you a lot in holiday insurance. If you have saved to pay for your holiday or other large purchase it is advisable to pay for it with your card and pay the money you saved to your card to avoid interest charges. This is also useful as very often the insurance products offered by your card are superior to those being sold by your travel agent. Do this and you not only have 56 days interest free credit and the peace of mind of the insurance cover but you have just saved yourself anything from $40 - $200 on additional products.
They also offer a convenience that is very attractive and these days of course they make a simple way to pay for goods and services online.
Now we have established that credit cards are not evil lets talk about when things go wrong.
Interest rates on credit cards can often appear low, however when you look closely you see that over a long term they are anything but. For short term borrowing they are not too bad but start stretching those payments out and it can become a nightmare. Paying only the minimum repayments asked for by the card company is a mistake, for instance if you have a credit card with $3000 outstanding on it with an interest rate of 17.9% (average for cards) then making only the minimum repayments every month will take over 40 years to clear that $3000 - that is longer than it takes to pay for the average house. Not only that you will have paid over $6000 in interest, suddenly that 17.9% interest rate does not seem so decent. This is because each month you pay the minimum payment some money (a small amount) will come off the $3000 and the rest pays that months interest. In the scenario above approximately $16 of the $60 minimum repayment would be used to reduce the debt, so the following month you owe $2984 which is less than the previous month so you will pay a smaller minimum payment of just $59.68 with even less coming off your outstanding debt, so what can we do about this.
1. Always Clear The Balance Every Month.
Not always possible and certainly not if you are struggling to make the minimum repayments. However this is certainly the cheapest way to use a credit card.
2. Reduce the Interest You Have To Pay
This can be done several ways. Firstly if you have good credit standing then you should shop around and get a card offering 0% on balance transfers for the longest period possible and keep doing this at the end of any interest free period. You could also get a cheaper loan from the bank to reduce the amount of interest you have to pay. The likeliest scenario of course is that you are paying the minimum payments as you can not afford to pay any more, if that is the case then consider this; by paying the first month minimum payment at $60 and then instead of paying the slightly reduced minimum payment the next month you just keep paying at $60 per month always the impact on your debt is remarkable. The time taken to pay off the $3000 has reduced by over 33 years to just 7 years and the interest has reduced over $4000 to just over $2000. Of course any increase in you monthly payment can reduce this even further, pay an extra $20 per month and the time reduces to just 4 years 7 months and the interest will only be $1250.
2. Stop Using the Card Immediately
Sounds simple, however many people pay off a payment every month and then use it again to the limit. You will never clear any debt this way and it bears saying as a reminder.
3. Contact Your Card Issuer
If you are really struggling with making the repayments on a card then please contact your card issuer as soon as possible. It is often possible that while blocking the use of your card to avoid further debt they will come to a repayment arrangement with reduced interest terms for a short period to help you out. If they do not know you are having difficulty they cannot help.
If your credit rating will not allow you to follow the techniques described you should visit the website in my signature link to address the problem and repair or re instate your credit score. Credit repair is possible and can help you to regain your standing with credit companies.
Credit cards in themselves should be used as detailed above for convenience and for the benefits they can provide, they should not be used as a form of borrowing to help you live day to day. You can only benefit from the use of credit cards as part of an overall financial plan and budget.
I used to have multiple serious bad debt and an appalling credit history and credit score. I have been through the mill and around the block several times and now through hard work, study and perserverance i understand the credit system and bad debt in a way only someone who has been there can. My pet hate is credit repair and debt consolidation companies who want to rip vulnerable people off by selling them a service that is not only simple to do by yourself but you achieve better results. All thats needed is some information, encouragement and knowledge!
