Used in the correct way, a credit card can be a really useful tool. But it’s very easy for the debt to spiral out of control, swamping you in payments that you can never seem to get ahead of.
To help you reign in your debt, I’m going to explain how I finally managed to shift mine once and for all. I’ll also reveal some tools you can use and how people around the UK are saving on interest payments.
Using credit cards and getting into debt
Although the very idea of a credit card can seem scary, it can be a practical instrument in the right hands. For big purchases, you can get added protection and spread your spending with a credit card. You can also build up a good credit score. However, in my case, I got one before I really knew much about personal finance.
My credit limit was only £1,000, but after a while, I’d used it up and was just paying the minimum repayments. Then, my debt overlords gave me the option to double my limit to £2,000. And I thought, sure, why not! I did it mostly just to give myself some breathing room, because I was an idiot and had no idea about things like emergency funds!
I was always able to make my monthly payments, but I never made any decent progress on squashing the debt. It was always just lingering around like a bad smell. Even worse, as the months went by, the interest on the debt was compounding. I had no idea about the concept of compound interest, and many people still don’t realise it works for debt as well as investing.
How to use a credit card properly
Here are three tips for making the most of a credit card.
1. Use 0%
If you are going to use credit, one of the first things to do is make sure you get a top 0% purchase credit card – something I didn’t do. This will give you a chunk of time in which your spending won’t incur any interest. So you can pay it off without getting sucked into a debt spiral. Here’s more info on types of credit cards.
2. Pay it off
This sounds obvious. But if you’re using credit, you either need to be able to pay it off in full or at least have a plan to do so. Otherwise, it becomes extremely hard because you’ll have plenty of other things in your life that take priority.
3. Balance transfers
I didn’t find out about balance transfer credit cards for a number of years. If you have credit card debt and you’re struggling, using a top-rated balance transfer credit card can really help. It means shifting the money you owe to another card provider that offers a 0% interest period on your existing balance. This gives you time to get your debt back under control and stop the interest piling up.
How I paid off £4,000 from my credit card
Once my credit debt was at £2,000, I needed to act. So I used a balance transfer card that gave me 24 months of 0% interest. This meant only paying just over £80 per month for two years to clear it.
Getting an extra couple of years to pay should have been enough. But in that time I decided to leave my job and travel the world, which was fun but meant the debt was once again relegated down my priorities. I ended up doing another balance transfer to give myself more time.
Then, the coronavirus pandemic happened and I had to leave an international job. Without any income, the £2,000 card balance quickly doubled to £4,000. Thankfully, I picked up a new job and, like many people, the lockdowns gave me barely any opportunity to spend money. So, everything I’d normally budget for went towards paying off the credit card. And I was able to get it to zero in just a few months.
How much people in the UK are saving on credit card debt
Without the option of balance transfer credit cards, I’d probably still have debt today. And it seems I’m not alone. New research from TotallyMoney shows that not switching to a market-leading offer could cost you an extra £1,831 in interest.
Some top balance transfer cards offer up to 31 months of 0% interest on your existing debt. Most cards do charge a small percentage of the balance as a fee, so make sure you factor that in. But more people than ever can qualify for these deals, and it’s madness to be paying interest on your credit card if you don’t have to.
I wish I’d learnt about balance transfer cards sooner. Without them, I’d have paid hundreds or thousands more in interest. So make sure you review every avenue open to you. Don’t pay more than you need to with credit. And if you need support with your debt, MoneyHelper offers a wealth of advice.
The post I paid £4,000 off my credit card: how to swipe away your debt appeared first on The Motley Fool UK.
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