Credit card debt not only costs a lot in interest, but it could also affect your chances of getting a loan in the future. But don’t despair! If you’ve accumulated a hefty credit card debt, you can consider strategies to reduce existing credit card debt. Here are six smart habits to help with managing your credit cards.
1. Don’t settle for the minimum
Your monthly credit card statement will list both the total balance payable on your card and the minimum monthly repayment. It will also let you know how long it will take you to repay your credit card debt if you only pay the minimum repayment each month and the extra interest you’ll pay. For example, if you have an outstanding balance of $1000 on your credit card at an annual interest rate of 18 per cent, your initial minimum monthly payment will be around $21. In this case, it will take you seven years and nine months to repay your debt. Whereas if you pay $49 a month, you’ll pay it off in just two years; saving nearly $700 in extra interest. To calculate other amount, use the credit card calculator on the MoneySmart website here.
2. Track your expenses
While the idea of creating a budget might be scary, you can start the process by understanding your daily expenses. TrackMySPEND is a useful app that tracks how you spend your money. By seeing exactly where your money is going, you can work out how you can save money and put more towards reducing your credit card debt. For example, that $5 coffee you buy at work each day amounts to around $1250 a year. That money can be used to repay your credit card debt.
3. Automate your payments
Most credit cards let you set up automatic repayments each month. Often you can choose whether to repay the minimum amount or the full balance. By automating your repayments of the full balance, you can save yourself time managing your bills and make sure you aren’t charged any late fees or interest on the outstanding balance.
4. Leave your card at home
Out of sight, out of mind is one strategy to reduce credit card bills. A study by MIT University found that people were more likely to pay more for something (up to 100 per cent in some instances) if they used a credit card rather than cash.
When you do use your card, try to choose one that matches your spending habits. If you drive a lot, perhaps a card that offers rewards for purchasing petrol could give you useful benefits. Alternatively, if your family lives in another part of the country, then a card that gives you frequent flyer points as you spend can help pay for your next visit.
5. Lower your limit
You can always ask your financial institution to reduce your credit card limit, capping the amount you can spend and keeping your level of debt under control.
It’s always better to get into the habit of managing your money, rather than allowing credit card debt to grow. If you have outstanding debt more than one credit card, you should consider taking action immediately to address the problem.
6. Consolidate your debts
When credit cards charge high-interest rates on balances, it can be hard to pay off your debt. Consolidating your credit card debts into a single loan could help you manage your debts. You could save yourself from paying multiple monthly fees and focus on managing one set of repayments and fees instead. See our tips to understand the pros and cons of consolidating your debts.
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This article provides you with factual information only, and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. Neither Pepper nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in this article. For information about whether a Pepper loan may be suitable for you, call Pepper on 13 73 77 or speak to an accredited Pepper Money broker.