How To Get Out Of Credit Card Debt
We have put together a step by step guide to help you assess your personal finances and help you address just how to get out of credit card debt.
Understanding The Term APR (Annual Percentage Rate)
Before you can address the question of how to get out of credit card debt, it is important to first understand the significance of APR. APR stands for (annual percentage rate) and is a confusing measure used by credit card companies but essentially is the measure of how much interest you will be charged each year for the money you borrow. So if your credit card company charges you 18% APR, this means that you will end up paying back an extra £18 for every £100 you borrow. Of course there is a way to avoid credit card interest and that is to pay off your credit card balance in full at the end of each month, that way you pay no interest charges.
This annual figure can be confusing because in reality we do not wait to the end of the year to pay part of our balance, more often than not we will make a monthly repayment to keep our credit card bill down and reduce interest charges.
If you had £4,000 outstanding on your credit card at an APR of 18% this would mean that each year you are paying £720 in interest. To roughly calculate your monthly repayment, divide the annual interest cost by 12, so £720 divided by 12 would mean that the interest is £60 per month.
Of course in reality credit card companies will add your interest charge to your bill and then charge you interest on your interest the following month, meaning that in reality your total interest charges are higher. This is known as compound interest and is usually what leads to spiralling credit card debts that get out of control and leads to individuals looking for an answer to that all important question of how to get out of credit card debt.
Now that we have explored what APR is and how it affects us financially let’s look at the step by step process of how to get out of credit card debt.
Step 1 - Calculate Your Total Credit Card Debt
Take some time to sit down and calculate exactly how much you owe in credit card debt. You may have two or even three credit cards and knowing your total debt figure is important, before moving on.
Step 2 - Calculate What You Can Afford To Pay
Once you know your total credit card debt, spend some time creating a budget including all your personal finances and expenditures, so that you know exactly how much you can afford to pay. This is a simple step and yet is often overlooked. If you negotiate new repayments before accurately calculating how much you can afford to pay then it doesn’t matter how much your repayments are reduced by, you may still not be able to meet the new repayment amount. A £100 reduction in your monthly credit card repayment my seem like a great idea at the time, until after calculating your finances you realise that you can only afford £50. By then it may be too late to go back and renegotiate. If you feel you need the help of some expert advice then try an organisation like Solve My Debt. Solve My Debt are staffed by experienced debt advisors and have worked with thousands of individuals across the UK suffering with debt problems. They can contact people you owe money to on your behalf and can also help you with debt management & debt consolidation and if appropriate arrange individual voluntary arrangements which are an alternative to bankruptcy. You can find out more about them at their website www.solvemydebt.co.uk.
Step 3 - Negotiate New Repayments
Once you have your total credit card debt figure and an exact summary of what you can afford to pay each month, contact your credit card company immediately and explain the situation. Give them a figure of what you can afford to pay. This can be a daunting experience but remember that whilst you owe your credit card company money, you are still a customer and they are still making huge profits from the interest that they charge you. It is unlikely that they will ask for full repayment immediately, especially when you are offering to make regular payments, even if they are less than expected. The credit card company are likely to accept some repayment rather than none at all and they know that in the long term they stand to make lots of money from you, so don’t let them push you around, remember the customer is King!. You may need to repeat this process with other credit cards you own if they are with different credit card companies.
Step 4 - Pay Off Credit Cards With High APR’s First.
This is one of the most important approaches connected to the issue of how to get out of credit card debt. If you have debt on more than one credit card, it makes sense to pay off the credit card with the highest APR first, providing that the total debts on both cards are similar. Doing this will save you money in additional interest charges and help you get out of credit card debt.
If you owed £2,000 on one credit card with an APR of 18% and owed 2,000 on a credit card with an APR of 20% then pay off the credit card with the higher APR first or you will pay more interest in the long term and end up with higher monthly repayments.
However if you owed £1,000 on one credit card with an APR of 25% and owed £6,000 on a credit card with an APR of 15%, then in this example it would not make sense to pay off the debt with the higher APR first.
Here is why;
£1000 at an APR of 25% means you will pay an extra £250 per year.
£6000 at an APR of 15% means you will pay back an extra £900 each year.
Obviously the total interest repayments on the larger debt would be greater than those on the smaller debt even though the £1000 you have borrowed on that credit card has a higher APR.
Do your calculations and work out which credit card debt is costing you the most in interest charges each year and address that one.
Step 5 - Consider A Balance Transfer
Balance transfers can be a helpful short term solution to the question of how to get out of credit card debt, but it is important to do your research.
0% balance transfers were introduced by credit card companies as a way of buying your debt. Credit card companies will make money out of you in the long term from interest they charge you and so can afford to offer you a short “interest free” period, in return for higher interest payments in the future.
Some credit card companies will charge you a fee to undertake a 0% balance transfer, which they add to your debt. Check out what this is before you switch. Also check what the standard APR is on the credit card you are changing to after your 0% balance transfer period. If it is greater than the APR you are already paying now, then you are likely to end up in more debt in the future from higher interest charges and monthly repayments.
Balance transfers can be useful however for individuals who experience a temporary blip in their financial circumstances, due to ill health or loss of employment, but where the individual concerned is confident they will shortly have the financial income to resume repayments.
Step 6 – Consider Paying Off Credit Card Debt With Savings
We all like to accumulate some sort of savings because they make us feel safe and provide an emergency fund. However if credit card debt is beginning to bite it may be worth reassessing the situation. As a general rule if your savings interest rate is lower than the APR on your credit card, it makes sense to use your savings to help reduce your credit card debt. This will reduce your interest charges and is likely to lead to lower monthly repayments, placing you back in control of your credit card debt and is just another option to explore looking at how to get out of credit card debt.
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