Love them or hate them, credit cards are an essential part of modern life. In fact not having a credit card can make some things very difficult, especially if you are buying online, booking flights or hotels or renting a car.
But because credit cards make borrowing money so ridiculously easy, it is very simple to quickly run up big debts that become more and more difficult to pay-off. Many of us have been there (myself included) and many are still there, using easy money to fund gadgets, holidays and the latest additions to their wardrobes.
Although my credit card debts never spiralled too badly out of control, I still developed a sort of psychological acceptance of the debt – if I am already £3,000 in debt, then another £200 won’t make much difference – which prevented me from getting too worried about paying the money back and I am sure that people with similar or larger debts just look at the problem and prefer to just live with it rather than doing anything about it.
The Credit Card Debt Blackhole
Banks and credit card companies make a lot of money – in fact they make serious profits and they do this by taking advantage of our desire to spend.
When a person spends money on their credit card, they are charged interest on the amount of money they borrow, often at a rate of 15 to 20 percent, until that money and interest is paid back.
- A credit card debt of £2,000, with a 15% interest rate will incur a charge of £300
- A credit card debt of £20,000 with a 15% interest rate will incur a charge of £3,000
Often people decide to only make the minimum repayment amounts required by their credit card company, however these repayments only cover the interest created by the debt and do little to pay back the original debt. Potentially people can easily spend the rest of their lives in debt, therefore to all intents and purposes they are slaves to the credit card company!
Say ‘No’ to Credit Card Slavery
The first issue to address is our attitude towards credit cards and borrowing in general. My 91 year old Grandmother loves using her credit card as convenient way to pay for her household bills, such as gas, electricity and water, but at the end of the month she always pays off the balance and is far too proud and thrifty to run up a debt.
The message is clear – Take advantage of the credit card company, rather than letting them take advantage of you.
When you make purchases on your credit card, you have a set number of days (20 or 30 depending on provider) before you will be charged interest. Provided you have paid back all the money you borrowed within that timeframe, you will not have been charged interest.
However you will have been able to benefit from the levels of consumer protection on faulty goods or fraudulent transactions that credit card companies provide and have taken advantage of any reward programmes (such as Nectar Points or Airmiles) that the card company offers.
The key point here is that you need to have the money in your bank account to pay back the credit card debt within the interest-free time period. My Grandmother will not make a purchase that she cannot actually afford to pay back. When she does need to make a big purchase, she plans and saves up her money first, so that she can afford to make the repayment straightaway.
Other tips for reducing credit card use are:
- Leave your credit card at home – you should only use your credit card for planned purchases, so rather than carrying it in your wallet, why not just leave it at home and avoid the temptation of using it for frivolous purchases?
- Build up an emergency cash fund – open a savings fund, that you can access in emergencies, rather than relying on your credit card for paying a plumber to fix a leak
- Stop trying to keep up with Joneses next door – letting go of the desire to have the latest and greatest takes a huge amount of weight of your shoulders and reduces your need to stretch your cash.
Climbing Out of the Credit Card Debt Blackhole
If you are in the position where you have a huge credit card debt and don’t know where to start, then help is at hand.
There is plenty of advice on the internet, our Three Step Guide to Clearing Your Debt is a good place to start and you can always contact the Citizens Advice Bureau for some face-to-face support.
The first thing to do is stop spending on your credit card or cards straight away. Lock them away so that you cannot easily access them.
Assess how much debt you are in and get this written down on a piece of paper. Is the debt all on one credit card or is it with a range of credit and store cards? Which debt is charging you the highest interest payment and can you concentrate your repayments on that card first?
Create a debt repayment plan, with monthly repayment targets. Can you raise additional funds by selling unwanted goods, trading down to a cheaper car or taking on part-time work.
Identify areas of non-credit card spending to cut back on and use the extra savings to concentrate on your debt repayments. Visit this page for money saving ideas.
Remember, with the right attitude, help, support and a good plan, it is possible to cut down on your spending and clear your credit card debt.
