As useful as credit cards are, they can be an all too easy way to rack up debt if you’re not disciplined. In fact, according to the Reserve Bank, New Zealanders had some $6.3 billion of debt sitting on their credit cards as of January 2015. So just how do you go about keeping your credit card debt manageable?
How much can I afford?
Firstly, think about how much you can afford to pay off each month and either ensure you don’t spend more than that or set your limit accordingly.
Just as you would for any kind of loan, sit down and make a comprehensive list of all your outgoings — rent, power, internet, rates, mortgage, food, petrol and so on — and subtract that from your income. Your leftover money will dictate how much credit card debt you can service. Ideally, your limit will be an amount you can pay off in full, that way you’ll avoid paying any interest.
Take control of your credit limit
When a bank approves an application for a credit card they may ask how big a limit you’d like (or tell you how much you can borrow), and in some cases they may even offer more than you asked for. Should you take it? If you’re disciplined enough to pay off your credit card each month, a higher limit may come in handy from time to time. However, it can also lead to temptation. Generally speaking, you should only ever borrow as much you need, so if you think a higher limit may get you in trouble down the track, err on the side of caution and reduce the limit to something you can afford to pay off.
Similarly, your bank may offer you an automatic credit limit increase from time to time, if you don’t want this to happen, tell your bank that you don’t want any limit increases unless you ask for them.
More than one card?
Multiple credit cards have their uses, however, when deciding whether to take a second card, you should employ the same approach as you would with a single card by looking at the overall level of debt. If you can’t afford the combined tally of two or more credit card bills, then stay away from a second card. Remember too that taking on a second (or third or fourth) card means you’ll be doubling up on annual fees and any other non-purchase related costs.
Take advantage of low-rate deals
One time when getting a second card makes sense is when taking advantage of a low-rate balance transfer deal — you can save a bundle in interest. Just make sure you don’t carry on spending on the card you’ve just paid off, otherwise you’ll soon find yourself in a worse financial position. Similarly, remember that any purchases you make on your new card will start incurring interest at the standard rate, rather than the special low rate.
Get smart with credit card costs
Because credit cards are unsecured borrowing, they carry a much higher interest rate. However, most credit cards (but not all, check with your bank) offer an interest free period of up to 55 days that you can take advantage of to save money. Here are a few money saving tips.
- Pay off your card in full each month. You’ll avoid paying any interest.
- Failing that, try and at least pay more than the minimum payment.
- Set up a direct debit each month so that you never forget to pay and avoid late payment fees.
- Avoid cash advances as they’re charged at a higher rate of interest and will start accumulating interest from day one.
- Make sure you understand any and all fees associated with the card so there are no nasty surprises.
- If you go over your limit, you may be charged an over-limit fee.
- Sign up for text and email alerts that tell you how much you need to pay and when.