Take the right steps to reduce your credit card cost
This is the time of year where a lot of Irish families take stock of their debt and plan for the year ahead and credit card debt always hits the Richter scale of priories.
Frank Conway, author of Cents and Sensibility, a financial guide, says that it is imperative families approach credit card debt with a firm plan to tackle it and keep it under control.
“Because of the compounding feature of credit card debt, it can quickly get out of control for families where the amount owed can remain stubbornly high,” he says.
A methodical and structured approach to getting out from under the burden of credit card debt will pay dividends and this approach works regardless of whether the outstanding balance is €2,000 or €10,000, Mr Conway said.
These simple steps can be followed by anybody looking to reduce their credit card balance and, ultimately, the amount of interest they pay.
Before you start reducing your credit card debt, know where you stand.
It’s not unusual for some families to live with a certain amount of denial about where the balance on the card really is, Mr Conway, founder of the Irish Financial Review and MoneyWhizz.org website, said.
Every €100 matters and if you want to put the cost of credit card interest into perspective, every €100 charged will cost almost another €100 if the card holder only makes a minimum payment.
Track your costs
This is a basic rule of good housekeeping — one that includes the entire family.
List all regular, necessary expenses (mortgage, utilities, insurance, car payments, minimum credit card payments, phone, cable, etc), and track other variable expenses such as restaurant meals, entertainment and travel.
This will serve as the foundation to your budget, Mr Conway said.
Keep monthly receipts on everything in an envelope and tot up at the end of the month. This will give you a reality check on where your money goes and help speed up your personal budgeting management.
Establish a budget
Become your own minister for finance and take an axe to those unnecessary household expenses.
The big trick here is to use the information from tracking your cost. You can be as clinical and precise as you need to be.
Of course, what you may not like, but what can pay financial dividends in the long term is that you will have to make some sacrifices.
But this means more money in your family pot and less in the credit card company year-end profits.
“Remember, cutting back just means reducing and becoming more cost conscious. It does not mean cutting out,” Mr Conway said.
Choose your exit route
In personal finance, there are a few golden rules, one of which is that where there are very high interest costs, you direct as much extra cash as you can from other areas of personal finance to pay those down.
So, if you have a number of credit cards, you pay off the highest of those first and work your way down to the next most expensive until you reduce the debt load.
Track your progress
Monitoring your plan is as important as first establishing it, according to Mr Conway.
Paying off high interest credit cards can be a very slow process as the interest charged is compounded from month to month (this means interest is added on to interest each and every month).
But success comes to those that are determined, patient and organised. Restricting the use of your credit card and using cash is proven to help people reduce their overall rate of spending.
We understand the value of cash more. Whereas with credit cards, well, they really are somebody else’s money and it is always easier to spend money that is not yours, Mr Conway says.
Credit cards are a wonderful invention
...But only if consumers know how to use them properly, according to Frank Conway
They allow people to use someone else's money at no cost for up to four weeks before having to make any repayments.
If you pay off the full amount owed on the credit card, there are no interest charges.
"That works out to be one of the best financial deals on the market today," Mr Conway said.
However, credit cards charge interest on a compound basis, which means that if you do not pay off the full balance on the card from month to month, interest charges get added to the card balance each and every month.
This is why it can be so difficult to pay off the amount owed once users get trapped in a cycle of debt.
Borrowing to pay off the amount owed on a card should only be considered as a last resort and only if the user surrenders the credit card.
Research has shown that credit card users often fall back on old habits of racking up bills within a few months of clearing a balance.
"It is called being a 'credit junkie' - a dependency that the well organised can break free from with a robust personal finance plan to help them," Mr Conway said.