Credit Cards and Debt Management
Credit Cards can be a great way to make purchases when you don’t have the cash to hand, but make sure you understand the real costs involved in using them, and that you’re not ending up paying masses in interest to a credit card company each month.
Most credit cards have a grace period for purchases, normally about a month, this means that when you use your card to buy something in a shop, you will not be charged interest on it until the following month. If you settle your credit card bill at the end of the month, this means that you have not paid any interest at all for that purchase, just the cost of the item you bought.
However, credit card companies do not make a fortune because of people settling their bills in full at the end of the month, they know that in reality you’re likely to let the balance, or at least part of it, carry on for at least another month, and in reality, for many months – so make sure you know that too.
Check out the interest rates on a credit card before signing up for one too, remembering that in many cases they offer attractive interest rates that only last for a set period. Check what the interest rates will be in the long term so that you know exactly what you are letting yourself in for in terms of monthly bills if you have any balance with the card after the initial stages.
Also, many types of transaction will have a different interest rate applied to them, and will not be subject to the grace period, so you pay interest on them from the day that the transaction took place. Transactions such as cash advances or foreign currency purchases are often treated in this way.
Order of payment
When you pay your credit card bill at the end of the month, you may also find that any funds paid will reduce the debts in a certain order. For example, debt owed towards purchases may be paid first, so that what’s left is the debt that accumulates that highest rate of interest, increasing the amount you will pay back over time.
More than the minimum
In general, the golden rule for using a credit card is to pay more than the minimum payment each month. This ensures that, even if you cannot pay the debt off in full now, you are at least reducing it and working towards it being paid off.
If you have multiple cards, particularly those with high rates of interest, it may be worth looking into balance transfers, but remember to check the interest rates not only for the initial period, but in the longer term too. Allow for it to take a longer period than you think to pay the debt off, as you never know what other expenses will arise in the meantime.
Credit card debt is one of the highest interest debts to have, so it is best to pay it off completely as soon as you can unless you want to be stuck with it in the long term.