6 tips to help you pay off credit card debt so you can start saving
Wednesday, June 17, 2015
We’re always talking about the importance of saving, but we do appreciate that sometimes you need to pay off debts before you can put money aside for the future. Here are some tips to help you tackle credit card debt (and start saving)
It can make more sense to pay off your debts before you start saving – particularly if the debt is on credit cards. Each case is different, but if you have credit card bills that you can’t pay off every month then it could be time to take action.
Clear debts or save?
Martin Lewis, founder of MoneySavingExpert.com, has some clear thoughts on this point. He says that if the cost of the debt is higher than the benefit gained by saving (ie if the interest you are paying on your debt is higher than the interest or bonuses you would earn through saving) then your finances will be in better shape if you pay off your debts first.
Sum it up
Don't bury your head in the sand if you know that your debts are mounting up faster than you can comfortably pay them off. The sooner you tackle it, the better. First, gather together all your statements from credit and store cards, and then assess the best course of action. If you can clear the debt without racking up too much interest: great. If not, you could consider transferring it to a cheaper or interest-free card, or maybe even consolidating it into a personal loan with a lower interest rate.
Reduce the interest
If you are carrying some credit card debt forward, make sure you're paying as little as you can for it. The average interest rate is around 18% but thankfully, there are plenty of cards that charge a lot less, with lots of providers offering a 0% interest balance transfer deal. A 0% deal can last for over two years, giving you a fighting chance to clear your debt without racking up any more interest.
There's usually a fee - typically up to 3% of the amount you're transferring - but this can be a lot smaller than the amount of interest you save.
Penalties for forgetting a credit card payment can add to your debt and make it harder to borrow money in the future. Additionally, if you've switched to a 0% balance deal, a late payment may cause the card company to cancel the offer and push you back on a sky-high rate.
It's easy to make sure you don't forget a payment by setting up a direct debit to cover the minimum payment every month – or to clear the balance in full.
Shrink your bills
All those bills for household expenses such as insurance, energy and internet are never going to go away, but you can usually cut them down by switching providers. You can also make savings elsewhere by cutting out things that are ‘wants’ rather than ‘needs’.
Budget: it will be worth it
If you’ve got your credit cards under control and reduced your household finances, setting up a budget will give you the discipline to keep your spending on track.
Want to know more?
Martin Lewis has some useful thoughts and information about when to clear debt before you start saving and about using balance transfer credit cards to reduce your payments. The Money Advice Service also has useful tips about paying off your credit card.
And once you are in a stronger position to save money, our guide to successful saving and information on putting a basic budget in place, can help you on your way.
This blog is intended to provide information, not financial advice, to help you make an informed decision about savings and investments. We do not offer financial advice. You should contact a financial adviser, who may charge a fee, if you want financial advice.
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