Practical approach to credit card debt

One of the more positive things about credit cards is that they're more flexible than loans. One of the negatives is that you pay more interest on credit card debt than you would on a loan. If you take a practical approach however, it is possible to keep your costs low. Below are some of the areas you should give extra attention.

Different rates for each type of action
Many card users will know what their typical APR is but that doesn't make it obvious as to how much interest they're paying; the interest is calculated depending on what you used the card for:

If you look through your credit card statement, you may find that there are different categories to your debt i.e. card purchases, balance transfer, cheque/money transfer, cash, etc. Each of these has a different interest rate, for example your monthly rate might be broken down as the following:

- Card purchases: 1.385%
- Balance transfer: 1.527%
- Money transfer: 1.667%
- Cash withdrawal: 2.075%

This means that if most or all of your debt is a result of card purchases, you pay less than if you had most of your debt as a result of money transfers.

Last in fast out
Credit card debt is a bit like moving plates with the use of a box; the last plate to be put in the box will be the fast to be taken out. Likewise, the last item to be added to your credit card balance will be the first to be deducted when you make a payment.
This is the traditional method, some card providers may use a different method, it's important to check just to make sure the method they use doesn't put you at a disadvantage.

If your credit card provider uses this method, it can help you to plan your payments. You will also know when to take advantage of the interest free period that's available on most credit cards.

A pound goes a long way
A majority of people who pay just the minimum payment on their credit card can afford to pay a bit more but don't do so because it doesn't seem like a small amount above the minimum payment makes a difference.
To show that even a small amount is of benefit in the long term, we'll use the scenario below as an example:

Jack and Jane have the same amount of debt on their credit cards and they pay the same monthly interest of 1.5%. They usually pay the minimum payment, but they've both realised they have an extra £5 every month that they could pay towards their debt.

Jack thinks the £5 is too small to make a meaningful difference to his credit card debt, so he waits for it to accumulate. After 10 months of accumulation, Jack now has £50 which he thinks is significant, so he pays it into his credit card debt.

Jane also thinks the £5 is small but knows that it will make a difference, so she pays the extra £5 every month on top of her minimum payment. After 10 months Jane has also paid £50 into her credit card debt.

So that's the difference?
When Jane paid that extra £5 in the first month, her interest charges for future months went down by an extra 7.5p, after the second month it went down by 15p, third month 22.5p and this pattern continued for as long as she paid that extra £5 each month. At the end of the 10 months she would've saved £3.37p in interest charges.

As Jack did not make any extra payments until the tenth month, he did not make the extra savings. In other words, Jack paid 7.5p more than Jane after the first month, 15p after the second, 22.5p after the third and so forth.

This shows you that every bit extra that you pay makes a difference however small. It also shows that the sooner you pay it the better in terms of long term savings.

Hopefully the above tips will encourage you to pay more attention to what you're paying, understanding your credit card charges will help you stay on top and maybe even save yourself a lot of money.