Saving money for the future is an important financial goal at any age.
But carrying debt is one way to inhibit your ability to save money, whether that’s for a major purchase or for retirement.
Not all debt is bad. A home mortgage, for instance, can be considered good debt. You need somewhere to live, and a home is an investment for the future, because homes have traditionally increased in value over the last few decades.
Student loans aren’t necessarily bad, as the money has gone towards an education that should increase your earning potential.
But some debt is considered bad, for instance purchasing items that don’t increase in value or contribute to overall wealth. A holiday or a vehicle could be considered bad debt.
But there’s one really bad debt to carry, and that’s credit card debt. That’s because interest rates on most credit cards are extremely high, making it difficult to rid yourself of the principal when you’re paying so much in interest. If you’re carrying credit card debt, it’s a good idea to learn how to get rid of it, and takes steps to do just that.
We’re here to help with the 4 things you need to know about credit card debt.
1. How To Stop Using Your Credit Cards
The first step in dealing with your credit card debt is to stop using them immediately. Sounds hard and kind of obvious, but of course, it’s not always that easy.
Getting out of debt means you have to take charge of how much money you actually have (in the bank) to spend, which means paying cash for any purchases you want to make.
To start, put your cards away in a safe, but hidden place, so you aren’t tempted to use them. Separate what you need from what you want, and make purchases based on how much money you actually have in the bank to spend.
Don’t get the cards out of their hiding place until you have the balances completely paid off.
And once you have them paid off, consider cancelling all but one or two credit cards (if you have more).
2. Make A Plan to Eliminate Your Credit Card Debt
If you have multiple debts, make a plan to pay off one card at a time, starting with the card that has the highest interest rate.
Or, tackle the card with the lowest balance, to get rid of one debt at a time.
You can also pay off the debt of the higher interest rate cards using a card with a low interest rate. Or see about obtaining a bank loan to pay off all the credit card debt. Be careful going into debt to pay off debt, however, because you still have debt to worry about.
Here are a few other ideas to get you on the road to paying off credit card debt:
- Trim expenses and use that money towards debt. For instance, eliminate buying a coffee at the barista each day, or purchasing lunch twice a week. Look at all your expenses and figure out where you can save money. Every little bit counts.
- Build a monthly budget that outlines all your spending, and include paying credit card debt as a non-negotiable in your spending habits.
- If you’ve been making minimum payments on each card, and you pay off a card, don’t spend that money on something else! Put it towards the next card on your list to pay off.
Consider contacting a financial adviser to get help with credit card debt. An adviser has experience with building financial plans, and can help you look toward investing for the future while eliminating debt.
After all, even if you’re carrying debt, you can still make contributions to invest in your future.
3. If You Choose To Have a Credit Card, Learn How to Use It Properly
Once you’ve paid off all your credit card debt, you need to decide if you will continue to use credit cards.
If you do, you need to understand how to use your credit card properly, or you might get yourself back in the same situation.
Here are some good tips:
- Carry only one or two credit cards, and resist the temptation to sign up for more cards.
- Keep track of your spending, using the monthly budget you developed when you paid off your debt. Don’t spend more than you make, and make a plan to save money.
- Pay the full balance, on time, every month.
- Resist the temptation to increase the limit on your card.
- Don’t use the card to make ends meet. Use cash whenever possible, particularly if you aren’t certain you’ll be able to pay off what you just bought.
- Don’t make large purchases immediately. Take a week to consider whether you really need something, and whether it fits in your budget.
Let’s face it. There are times that you have to make a big purchase, or at this time of year (Christmas) you’re looking at paying for Christmas gifts.
Other popular options like Afterpay may be a better choice than a credit card.
With this service, available retailers offer customers the ability to “buy now and pay later.” You won’t have to pay fees or interest as long as you make four equal payments, once every fortnight. However, if you don’t make the payments, there is a late fee, so it can be a slippery slope as well.
It’s good to set aside money on a regular basis to establish a cash emergency fund. Having an account that’s set aside for unplanned expenses can help offset needing to use a credit card and getting back into debt.
For instance, let’s say the furnace quits on your house. Or your car suddenly needs major repairs.
If you have an emergency fund, you can use that money rather than find yourself back into debt on a credit card that charges high interest rates. Once the big expense is covered, you can resume putting money into your fund, and you won’t have payments to make or interest to pay. It’s also helpful in challenging times, like if you were to lose your job or need to move location.
Final Thoughts
Using a credit card is not necessarily a bad thing. Credit cards can make it easy to make purchases, and some have rewards programs that can provide you with a bonus at the end of the year.
But unless you’re able to pay off your balance every month, it’s not a good idea to use credit cards. The key is understanding how your credit card works, and ensuring you don’t carry debt from month to month.
Make a plan to eliminate your debt using our 4 things you need to know about credit card debt, and get yourself on the road to a better financial picture.
