Great tips for the Great Recession: Six ways to jettison credit card debt
1st Apr 09, 1:17pm
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By Alex Tarrant The interest charged on credit card balances can hurt when the economy is growing, let alone when it's in a Great Recession. Many workers and families are being squeezed by credit card debt, particularly those laid off, or finding it harder to get work. About 70% of outstanding credit card advances in New Zealand are interest bearing, data released by the Reserve Bank of New Zealand shows. This needs to come down. We thought that it would be good to start a discussion focusing on ways to reduce credit card debt. We have six ideas and invite you to include your own and join the discussion in the comments space below.
- Credit card balance transfers can be helpful if you think you can pay off your card over the term offered at the low balance transfer interest rate. At the moment, banks are offering balance transfer rates of around 5% to 9%, generally for a six month term. The offer is for a customer of one bank to swap over their outstanding credit card balance to the bank offering the balance transfer. The low interest rate applies to the amount swapped over, so any spending above this will be charged at a higher rate (if it comes to incur interest). This is an effective way to pay off a credit card balance if you have a repayment plan and manage not to use the card over the repayment period.
- Try to pay more than the required monthly minimum. Banks send out a monthly slip to credit card customers telling them what the minimum payment requirement is for the month. Many just pay the required minimum and wait for the next slip. Try focusing on paying more than the required minimum, you might be surprised that you can afford to do so and you'll pay off your card faster.
- Take out a personal loan at an interest rate lower than your credit card rate. Although there is often not much difference between personal loan rates and credit card rates, you may find that even as little as a 2% reduction in the interest rate helps. Pay off your credit card with a personal loan and then work at paying off the loan at its lower rate than you would have been paying for the credit card. Personal loans can also come with repayment plans for those who need them.
- Use a low rate credit card. Many banks offer no frills, low rate credit cards. A similar case to the balance transfer option, you will be paying a lower rate on outstanding balances. One thing to watch with these cards is any fees. Often is is less expensive to be on a higher interest card (when balance is generally in the NZ$500-NZ$800 range) because the annual fees for the low rate cards are often higher than for normal credit cards.
- Spend less than you earn. Simple. This should be included in every debt pay-off plan. Have a closer look at what you are using your credit card to purchase. Do you really need that coffee? (Or could you get a small one instead of a large one?) We've been taught how to spend. The hardest bit is often making yourself not spend. When it comes down to the wire, your spending actions are controlled by you.
- Pay off the balance in full every month. Just tell the bank to set up a direct debit from your cheque account for 'pay off in full'.
Of course the next issue is what to do once you've paid your credit card off? How can you stop racking up the debt again? One option is the VISA debit cards. They has the characteristics of a credit card (ie. it has a VISA number so you can buy things on the internet), except you can't access credit with it - whatever you use it for, you must already have the money in the bank. Need credit for a big one off purchase? Look at getting a personal loan. Your ideas? Comments below please.
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