Posted February 2017 by NZCU Baywide
For many Kiwis, credit cards have become a modern convenience. A late-night online purchase here. A lunch with friends there. With the increasing pace of daily life, it’s all too easy to pull out the plastic to pay for purchases.
And credit card providers know it. When you make those purchases, they start rubbing their hands together because the higher your balance, and the longer it stays this way, the more you’ll end up paying.
Much like a personal loan, you may have turned to a credit card for a big-ticket purchase. Maybe it was to finance a new car, pay for a holiday or renovate the kitchen. But unlike a loan, it’s the extra little unforeseen purchases that can add up along the way. As of 2016, it’s said that New Zealand had $6.9 billion in national credit card debt.
That’s roughly $1,500 for every man, woman and child. Yes, including you!
Now is as good a time as any to start paying off your debts, so here are 5 tips that’ll help you cut up those credit cards once and for all.
1. Make more than the minimum repayment
Every month, you make your regular credit card payment. You work out how much you owe that month, make the transfer, and then pat yourself on the back for paying off your debts. You’ve got this covered, right?
Not necessarily. Making the monthly minimum repayment isn’t the same as paying off your credit card debt. The former will see you staying in debt and paying yet more in interest, while the latter offers a light at the end of the debt tunnel.
Credit card providers love it when you only make minimum repayments, because you’re only just covering the interest on the outstanding amount, and hardly touching the actual debt itself. Take a look at your most recent credit card statement, for example, and you’ll see how much - or how little - progress you’re actually making each month.
It’s shocking, right? By putting as much extra, excess or spare cash towards your credit card debts as you can, you’ll start to chip away at the debt itself and save yourself money in the long run. That’s money you could be putting away into a savings account or using to prepare for your future by investing in a term deposit.
2. Pay off high interest debts first
Generally speaking, you want to pay off the card that carries the highest interest rate or the smallest balance first. This may sound obvious, but it’s easy to lose track of which debt is which when you’re juggling the demands of daily life, bills, plus two, three or even four credit cards.
Now that you’re making more than the minimum payment, direct these payments towards the credit card with the highest interest rate first. For example, one credit card may be charged at 9% p.a., while another is charged at 14% p.a..
By focussing on this higher rate card, you’ll end up paying less interest and save yourself money.
But what if the rates on your cards are all about the same? In this case, the Snowball Method is a popular way for dealing with these debts.
Here’s how it works:
- Arrange your debts in order from highest to lowest.
- Pick the smallest debt, and focus all of your efforts on paying this off first.
- Once this lowest debt is gone, move the payments you were making to the second-lowest debt.
- Repeat this process, slowly ‘snowballing’ your way through to your biggest debt.
This method will help you quickly pay off your debts, and provides great motivation. Seeing these debts start to disappear will help you keep focussed, and ensure you never have to struggle with debt again.
3. Move your debts around
Many New Zealand providers offer low or no interest transfers if you move your balance over from your current lender. Offers like these are the perfect opportunity to save on interest and quickly lessen your debts, but only if you’re careful.
Here are some things to keep in mind:
- These lenders aren’t just doing this to be nice. They’re betting on you racking up yet more debt or not being able to pay off the transferred balance within this grace period.
- Moving your existing balance could also harm your credit score in the short term, though there are also ways you can improve your credit score in response.
- There’s often a transfer fee of between 3-5%.
With this in mind, transferring a balance could still save your money. Just make sure you’re transferring a balance you know you can pay off within the low or no interest grace period. Remember, the money usually lost to interest will now be going directly towards the debt itself, which makes getting rid of this debt that much quicker and easier.
Just remember to carefully check all the terms and conditions beforehand to avoid any nasty surprises that could leave you in a worse position than where you started. And cut up the old credit card while you’re at it, to avoid running up yet more debt.
If this all sounds too difficult, then consolidating your debts might be a better option for you.
4. Consolidate your debts
What is debt consolidation? It’s an easy, effective way to bring all of your debts together into one easy-to-manage payment, often charged at a much lower interest rate than you you’re paying now.
If you’re currently struggling with two, three or four credit cards - if not more - debt consolidation could be the answer you’re looking for. The process is easy, you just take out a debt consolidation loan, and then pay off your outstanding debts.
It isn’t just credit card debt, either. You can use a debt consolidation loan to pay off all different kinds and combinations of debts. And once you have? You’ll be left with less paperwork and one simple, easy to manage monthly repayment that will finally give you the chance to cut up those credit cards for good.
5. Leave the credit card at home and use cash
A lunch with friends here. A small purchase there. Over time, all of these small purchases add up. In fact, pulling out the credit card and giving it a quick swipe is as much a habit as breathing or blinking: we do it every day, often without thinking about it.
But like any habit, this one can be broken too. Start by leaving your credit card at home, carrying cash, or using a debit cards. At one point you might have needed a credit card for online purchases, but with debit cards now filling that role there’s no longer a need for present you to leave future you with a debt to pay.
It’s time to pulverize the plastic!
Sure, credit cards may be convenient, but with these ideas in your debt-busting repertoire you won’t need to depend on the plastic in your pocket nearly as much as you do. And if you’re in need of yet more ideas? Don’t forget to check out our guide on how Kiwis just like you can live your life debt free in 2017.