Taming Your Credit Card Debt

Are you finding that your credit card debt is running out of control? Borrowing on credit cards usually seems a good idea at first, allowing you to make purchases now and worry about them later, but that worry can only be put off for so long.

Before you know it you might be juggling three or four different cards and borrowing off one card simply to pay off another. If this sounds painfully familiar to you, now might be the time to start taming your credit card debt, with these six smart steps.

Step One: Tackle Most Expensive Debt First

Make no mistake, credit cards are convenient, but convenience always comes at a price. Credit card interest rates have been moving upwards over the last few years and you may be surprised to find out that the average credit card rate is now a whopping 18.5%. Store card rates weigh in at closer to 30%.

If you are juggling several credit card debts, you need to act smart and concentrate on repaying the most costly debt first. Aim to making the highest monthly repayment you can on the card with the highest rate, and pay the minimum amount on your other cards. Once that card is paid off you’ll have a little extra money to help pay off the next card, and so on.

Step Two: Set Up Automatic Repayments

One of the most common mistakes people make with their credit card debts is to miss an occasional payment here and there. Not only does this lead to additional charges and therefore a bigger debt to repay, but it also leaves a black mark on your credit history, which will make it harder for you to get credit in the future.

Avoid this by setting up a regular payment, usually a direct debit or standing order, to be taken from your current account. Most credit card providers allow you to choose to repay either a fixed amount each month or the minimum monthly balance. Try to make a monthly budget and think about what you can realistically afford to repay each month.

You can also set up repayment details on your current account that will allow you to make ‘one-off’ repayments whenever you choose. This is handy if you find yourself with a little money left over at the end of the month, which can go towards repaying your debt.

Step Three: Play Smart with Balance Transfers

We’ve all seen those advertisements for credit cards with 0% interest rates on balance transfers, usually for an introductory period of between six months and a year.

These 0% deals are a good thing, provided you are sure that either you will be able to repay your outstanding balance during that 0% period, or that you will be able to find another low rate card once the promotional period on this card comes to an end.

Make sure that you understand the terms and conditions that come with the low rate offer. Most companies try to claw back the interest they lose out on by charging higher penalty rates if you go over your limit or fail to make a repayment.

Bear in mind that the low interest rate may apply to balance transfers only, not new purchases, and also remember that a 0% rate doesn’t give you licence to build up more debts, it is only giving you a bit more time to repay your existing ones.

Step Four: Talk to Your Borrower

Most people like to have a good moan about their bank or credit card company, but when was the last time you actually asked them to review your situation? A few minutes conversation on the phone negotiating your lending terms could help you save hundreds of pounds in interest.

If you are having problems repaying your debt, talk to your lender and see whether they would be able to help you come up with a solution. Lenders are being encouraged to be seen as responsible lenders, so they should be willing to listen to you.

Be persistent, don’t take the first ‘no’ as a final answer and if you don’t get the service you expect, think aloud about moving to another credit card provider. What have you got to lose?

Step Five: Know your Limits

Of course knowing what the limits on your borrowing should be would be a good way to avoid piling up debts in the first place. It can, however, also help to improve your current situation.

Credit scores not only look for the amount that you currently are borrowing, but also the amount of credit available to you; what they call your ‘total available credit’. So, if you have one credit card with a limit of £3,000 and you have borrowed up to the maximum, the company reviewing your credit score may mark you down as being too close to the maximum for comfort.

On the other hand, if you have two credit cards, each with a limit of £3,000 and you have an outstanding balance of £1,500 on each of them, you may have a more favourable credit score, because you do not appear to be stretching yourself too thinly on either card and have a higher total available credit. Just one of the inconsistencies associated with credit scoring!

Step Six: Closing an Account? Think Again

Similarly, conventional wisdom usually suggests that once you have repaid a credit card balance in full you should close the account. The drawback of these seemingly sensible move is that it too lowers your total available credit (as in the previous example if you paid off one card it would reduce your total available credit from £6,000 to £3,000). This could actually reduce your credit score.

So, instead of closing the account, think about cutting up the card instead. After a period of inactivity the lender may try to lure you back with a 0% balance transfer offer.

If you do decide to close an account, remember to close a newer one first. Credit scores prefer see customers who have retained cards over a long period of time.