It is the last day of Debt Awareness Week 2023 in the UK. And as such I have decided to write an article on how to clear credit card debt. This, in my personal view, is one of the most expensive types of debt to have. The only exception to this can be a payday loan – this can literally cost you an arm and a leg.
People often think – that it is only the irresponsible who find themselves in situation where they have a lot of debt and high interest rates to pay. Finding yourself in a situation like that unfortunately is much easier than one can expect.
Below I will explain why having credit card debt is a really big issue for you. I will also share some ideas on what are the best ways to clear debt and allow you to get in charge of your personal finances once again.
why credit card debt is bad
Credit cards can become really expensive real quick if the owner does not use these responsibly.
Credit card interest rates normally cost anywhere between 18% to 35%. On top of this, some cards will also charge you an annual fee. These fees can be as high as £575 per year for the Platinum Amex Card.
Often credit cards offer some exciting perks. These will include insurance, airport lounge access, reward programs, etc. The list goes on and on. These perks can be worth the fees depending on your life style.
The biggest issue however – the cost of having a credit card if you are not able to clear your balance monthly. The interest that you will be charged even on the cheapest card is incredibly high.
With an average credit card debt in the UK at roughly £1,300 per person even the cheapest cards with 18% interest would cost you just under £235 per year. That’s a lot of wasted money if you think about it.
What is even worse – there is a stealth cost to having credit card debt. It’s the impact to your credit score. This can impact you significantly and you will end up paying the price for it in years to come.
balance transfer credit card
There is a list of things to do if you find yourself in a situation where debt has become an issue. The first thing I would suggest looking into weirdly – getting another credit card.
Yes, that wasn’t a typo. People with credit card debt issues should consider getting one more credit card. And specifically – a balance transfer credit card.
What these products allow you to do – transfer your loan to another lender. The biggest perk you get with it – there is a period when you have no interest to pay on you credit card balance. This can be as long as 3 years.
The interest free period you secure on your new card should become your target to clearing the debt you found yourself in.
A watch out with the above cards – as soon as the interest free period comes to an end these cards can become very expensive. You want to make sure you clear you debt within the interest free period.
overpay your minimum payments to clear your credit card debt quicker
This step can be used on it’s own or in combination with getting yourself a transfer credit card.
Overpaying your minimum monthly payments should be the key focus for anyone focused on clearing their debt. This will not only make you debt free quicker, it will also allow you to save significant amount of money in interest in case you don’t have transfer credit card.
Becoming debt free quicker should be the target even for those with transfer credit cards. This way you no longer have to rely on things going the same way they currently are.
If you lose your job yet you were overpaying your debt there is a chance you will have way less stress as debt has been taken care of while you had money available to you.
consider a cheaper loan
One alternative to how you can repay your credit card debt quicker – get a personal loan and use that money to pay your credit card off.
Don’t get me wrong – doing the above doesn’t help you in reducing your debt at all. However, what it does for you is amazing. Your loan will often come with an interest rate that is way below the one you pay on your credit card.
I had a look today and for me personally the numbers look the following way. My credit card interest rate is currently at 18.6%. The first loan I managed to find online is 4.8%.
If I was to take the loan and use the money to cover the credit card I would save myself 13.8% of interest rate payments per year.
What this means – every £1,000 of debt I would be looking to clear would cost me £138 less per year. This money could be used to overpay the personal loan instead and become debt free quicker.
the last resort
This step is something that should be avoided at all costs possible. However there can be cases when there are no alternatives you can think of at all.
I am talking about bankruptcy as the very last resort.
Going bankrupt does 2 things to you – firstly it clears all your debt. It does so however at an incredibly high cost to you. It destroys your credit score.
After going bankrupt you will not be able to get a loan, a credit card, a mortgage or any other financial product you might be thinking about.
Your credit report will have a massive red mark all over it and there will be nothing you will be able to do about it for many years to come.
This will impact your credit score for a minimum of 6 years. This will make simple things like getting a new phone contract a mission impossible.
summary
Clearing debt should be the priority for anyone finding themselves in a tight spot. There is a number of tools available for you to use that can significantly reduce the time and the amount if interest that you end up spending.
When you are in debt – it is likely that there is more than one pile of debt. Make sure you prioritise the debt that costs you the most. This will be the quickest way for you to clear all the debt that you have.
Once you have cleared the debt – prioritise building an emergency fund. This can help your future self avoid situations where you are in debt that costs you a lot once again.