OSA - Money Academy

According to statistics from The Money Charity, it would take more than 26 years to repay the average level of credit card debt, if the user only makes the minimum monthly repayments.

But what if you could pay off your debt much faster than that? While clearing those outstanding card balances can sometimes feel like an impossible task, the good news is you really can do it if you plan ahead and take some strategic action.

1. Pay off your highest-rate cards first

If you have multiple cards, one of the easiest ways to save money and eliminate your debts faster is by prioritising paying off the cards with the highest interest rates. This makes perfect sense, since the card with the least favourable rate accrues the most interest each month and is, therefore costing you the most money overall, while also taking the longest to repay.

Begin by sitting down and working out the interest rate for each card, then put them in order from the highest through to the lowest to see which card you should focus on first. Once you have paid the balance on the first card in full, you can then move on to the second one, and so on.

Prioritising your debts in this way means you’ll limit the amount of interest and pay off your most expensive debts first. Win-win.

2. Pay off the card with the smallest balance

Another popular option is to start by paying off the card with the smallest outstanding balance.

On a logical level, this doesn’t make anywhere near as much sense because it fails to take into account interest rates, and therefore it’s likely to cost you more money over the longer term.

That said, the advantage of this method is that it gives you a psychological boost much earlier on in your journey towards becoming debt-free. Imagine how good it will feel to completely clear that balance, cut up that card and strike it from your list of debts!

3. Make more than the minimum monthly payment

One of the biggest mistakes people make with credit card debt is only paying the minimum amount each month. Sadly, this is often only enough to cover the interest, so you’re not actually eating into the capital much and getting any closer to paying off your debt!

If you can afford to, you should always make more than the minimum monthly repayment - and pay off as much as you can afford. It’s surprising how upping the amount even by a little can make a huge difference towards helping you reach your goal.

For example, let’s say you have a card with an outstanding balance of £1,500, an APR of 20%, and a minimum monthly payment of 1% or £25 (whichever is greater).

If you only make the minimum payment each month, it would take 13 years and 10 months to repay the balance in full, and you’d accrue a whopping £2,627 in interest! Up this amount by just £5 (to £30) and you’d instead pay it off in 8 years, while almost halving the interest to £1,363. Double your monthly repayment to £50 and you’d clear it in just 3 years and 5 months – and you’d pay just £523 in interest.

4. Make a balance transfer

One of the biggest reasons why people struggle to pay off credit card debt is that a large proportion of the amount they are paying each month is simply going towards paying the interest. If you have cards with higher interest rates, you can save a lot of money and repay your debts much faster by transferring some (or all) of your debt to a 0% balance transfer card.

Typically, balance transfer cards have a 0% introductory rate lasting for between 12 and 24 months, meaning that during this time you won’t have to worry about accruing interest and can instead focus on bringing down your outstanding balance. You’ll usually have to pay a fee of around 2% to 3% to qualify, but this is often well worth paying when you take into consideration the total savings.

5. Get a lower rate card

One problem with 0% balance transfer cards is that you’ll typically need to have an average-to-good credit rating to be accepted.

If you don’t have the credit rating for a 0% card but like the idea of making a balance transfer, it’s worth doing some research and finding an eligible card with a lower interest rate than you are currently paying. Even if this is 6% or 7%, you could still save a LOT of money and be able to pay off the debt much faster.

On a similar note, an alternative may be to consolidate debt with a single loan. Loan broker Growing Power state, “a debt consolidation loan means that you have a single payment to worry about and, as long as you have carefully done the maths, a lower monthly outgoing”.

6. Avoid unnecessary fees

Finally, there are a few things you can do to avoid racking up any unnecessary fees along the way. For example, make sure you avoid missing repayments and incurring late fees by setting up a monthly direct debit. Just be sure to check you have enough money in your current account, otherwise you might incur overdraft charges. Likewise, avoid withdrawing money from cashpoints, which again usually incurs a fee.

---

So, there you have it. With a little bit of planning, you’ll soon be well on your way towards clearing your credit card debts. Good luck!

First things first - what are store cards?

These are like credit cards but are specific to a designated store, so unlike credit cards, they can’t be used elsewhere. They do share similarities with credit cards though, such as the accruing of interest and often the requirement to be repaid later (see further down). Many shops offer them to encourage customer loyalty, but they shouldn’t be confused with loyalty cards, which offer a reward in the form of points or other offers. Although some do offer discounts as well.

What are the risks of using store cards?

It depends on the person, but for some people it can be all too tempting to spend more money on a store card because of the lack of cash exchanging hands. A piece of plastic (the store card) is handed over and the customer receives the goods. It’s only later when the first payment is due when reality can set in. What may have seemed like a bargain in the store, now becomes a lot more expensive as interest is added to the remainder each month. Then if payments are missed, more interest is accrued. In some cases, court costs are also added, if things escalate that far.

So why would anyone want a store card?

There are reasons to get a store card. Some stores will offer a discount for the first purchase(s) using their card. If you’re planning on making a cash purchase, then you can save money if you sign up then use the money to pay off the balance in full.

Although this is rare, some stores (such as a certain well-known high-street catalogue shop) will also offer higher-priced purchases on a buy now pay later (either 3 or 6 months) basis.

This is perfect for those times when something breaks and needs to be replaced. You can get the goods now and pay for them later without incurring interest, provided you pay in full before the 3 or 6 months are up. If you don’t, all the interest is added to your balance.

If you’re the kind of person who can keep up with payments and isn’t likely to forget, then you can make a store card serve your needs.

Improving your credit rating

If you’ve never had credit before or had trouble making repayments in the past, then you may not have much of a credit rating or a poor one. If you ever want to apply for a significant loan or mortgage, you need a good rating. By taking out a store card and meeting the repayments on time, you can improve your rating and increase your chances of getting credit such as a mortgage, in the future. If you’re likely to get side-tracked and forget the ‘due by’ dates, you may want to set reminders in your phone and spend time ensuring that you have the money set aside to cover your monthly payment.

You will also find that many jobs which involve working with money and/or the general public will insist on doing a credit check, so you can improve your chances of being employed, as well as getting a bank account if you don’t already have one, or if you decide to apply for one with better perks.

What to look for when getting a store card

Most of us never read the terms and conditions, but you should. You need to know how much interest you pay on purchases. For example: if you spend £300 in one purchase, but end up paying double or even triple in interest after only paying the minimum each month, then you probably won’t want to sign up.

Consider whether you really need the item(s). Would you have made the purchase anyway if you didn’t have the store card? Is it available cheaper elsewhere? That may mean saving up for a longer period of time to buy it, but the money you save in interest alone could be worth the wait.

If you really need the item, shop around, not just for prices on the goods you want to buy, but for the interest on different store cards and the length of time you have to repay the money and when the first payment is due. You should also consider how much you can afford to pay each month. Paying a little more than the minimum could potentially save you money on the total amount of interest.

What are the alternatives to store cards?

If you’ve decided against using a store card but are still struggling to purchase something you need, there are other options. You can borrow money from friends and family, usually interest free, or you can check out charity shops. Some goods aren’t ideal to use second hand, but many items can be in great condition and completely usable, so it’s worth a search if you don’t want to get yourself into debt. Also, consider downgrading. For example, if you’re used to a certain brand or size of appliance, such as a cooker, you might get it cheaper in a lesser-known brand or smaller size.