Credit cards make spending money so easy. The process is one step removed and makes us far less careful about it than if we were handing over our hard earned currency. The combination of this with the fact that they are so easy to obtain for most people can be a recipe for disaster.
The use of credit cards has increased enormously over the last decade or so. Lenders are not always responsible about who they offer cards to - often people who clearly have no chance of paying them back if they use them to their full credit limit. Spending money on credit cards is one reason for many of the personal debt problems that people have today.
If you are one of those people with credit card debt, there are certain ground rules that you need to be aware of if you want to put the debt behind you. First and foremost being that you should not consider borrowing more money to pay off your debt, or taking out more credit cards for spending. Debt is rarely improved by borrowing more money and your situation is much more likely to be made worse than it was before. With credit card debt the best solution is to try to move your debt to another card with the lowest interest rate you can find, preferably 0%.
Balance Transfer You Way Out Of Debt
You need to look for cards with the best interest rates for 'balance transfers'. It doesn't matter what the rate is for purchases, because you aren't going to be making any. This is a very important rule - when you do a balance transfer, you must forget that card as far as spending goes. You will rarely find a card that has a special deal on both balance transfers and purchases, so chances are you will soon lose anything you gain on the balance transfer deal if you start spending on the same card.
You need to have some idea about how long it is going to take you to pay off the total debt on your credit cards. If you know you can do it in about a year, then you can look at doing one balance transfer with a good 0% deal and that should be all you need. Once you have transferred, you can just concentrate on paying back what you owe, without being charged any more interest. Just make sure you focus on when the 0% deal runs out and that you can pay if all off by then.
If you need longer than that to pay it off, then you can either find the lowest rate you can for the 'life of the balance' (you are guaranteed that rate until the debt is all paid off) or if you are organised and disciplined you can keep transferring your balance to the next special offer 0% deal and avoid paying any interest at all. I stress that if you are not organised this will not work and you will end up paying interest and other charges. Be honest and decide whether this is for you or not.
Understanding Credit Cards
The way you deal with credit cards will be improved by facing up to some basic truths about them first. The first thing to remember is that the every single credit card is designed to make money for the card company - they would not exist otherwise. This does not mean that there are not ways to take advantage of the benefits of credit cards without paying the card companies, but you need to understand where the traps are and how to avoid them.
They turn a profit by making it very easy for you to spend money you don't have, and charging you on what you have borrowed until you pay it back. The big difference between cards and loans is that with a loan your repayments are fixed, so you definitely pay interest, whereas with a credit card you can avoid paying any interest at all if you pay off everything you spend every month.
The card companies have a vested interest in you not clearing your balance each month. They hope that you will not repay everything you owe so that they can charge you interest on the money you have borrowed. Credit card companies are also good at building in additional charges for things like late payments or going over your credit limit, so there are lots of ways of getting more money out of you if you do not understand and follow the rules carefully.
In the UK you will see the term APR used in all credit card advertisements. APR stands for Annual Percentage Rate and is the rate of interest that you would need to pay on any debt using the card over the course of a year. Putting the APR on information about credit cards is a requirement of the Consumer Credit Act 1974, and is intended to allow people to understand the longer term impact of the interest rates, and to enable fair comparisons between different cards. You can imagine how difficult it would be to compare the deals offered by several cards if one used monthly interest rates, one annual, etc.
The Minimum Payments Trap
All credit cards have a minimum payment amount which is the least you must pay each month and this is generally about 2 - 5% of the balance. As this is such a small proportion of the debt, you will take an awful long time to pay it off if all you do is make the minimum payments. Remember, the longer you take to pay back the debt, the more the card company will get from you in interest charges.
What the credit card companies dream of are customers who promptly pay the minimum payment each month. This gives the companies the reliability of someone who pays them regularly, but allows them to charge a great deal of interest because they take forever to pay it back. You should aim to pay off the full balance every month if you can, but even if you can not manage that, you ought to arrange a fixed payment for the most you can afford. Always avoid the trap of just paying the minimum payment.
The Cash Advance Rule
Credit cards have their uses, but getting cash advances is not one of them. You will almost always be charged a lot of money for doing this, so the best approach is to act as if it is not possible, and use other means for getting cash. If you do use a credit card for a cash advance there are likely to be additional problems such as any repayments you then make not going towards paying off any of the very expensive interest on the cash advance until you have cleared all the other debt.
Follow these guidelines and you can use credit cards for cheap borrowing and free credit, without paying for the privilege.
K D Garrow's website offers free, unbiased advice on a range of debt related issues, including recommendations for the best debt management companies in the UK and US. Read reviews and recommendations for reputable debt settlement companies on the author's Help With Debt website. K D Garrow has worked as a senior manager with significant financial responsibility for the last twenty years.
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