Managing your credit card balance

When it comes to credit cards, we always think of that classic piece of advice: “Don’t spend beyond your means”. There’s a little more to it than that when it comes to managing your credit card balance, so buckle up! We’re diving in.

Ever heard a story about someone in way over their head with credit card debt and wondered how that happens? 

Say you get yourself a credit card with a modest $1,000 credit limit. You might think, “If I keep my spending controlled, I can manage the repayments on that.” Then one month you spend that little bit more than you can afford to repay, so interest begins to build. Maybe you haven’t got an automatic debit set up, so you end up paying a few late fees. The amount you owe just keeps building, more and more difficult to repay in full. Now, you owe far more than the value whatever you bought in the first place. It’s an easy trap to fall into!

If this sounds a little familiar, it might be time to put that credit card somewhere out of easy reach. It might be time to get your credit card balance under control, and work out a better plan for using your credit card.

It’s important not to spend more on your credit card than you can afford to pay off, even if it might be attractive for credit card rewards or impulse purchases. If you don’t have a payment plan in mind, it’s easy to end up deeper in debt - with your credit score taking a hefty hit.

Once you’ve decided to get a handle on your credit card balance, it’s all about having a plan. We’ve put together some dos and don’ts for staying on top of your credit card balance.

A credit card may or may not be the best method of payment for you, so it’s important to weigh up the positives and negatives of it as a payment option. Many of the positives and negatives cross over with other payment methods, so make sure to do your own research on debit cards, personal loans, and Buy Now Pay Later, as each can come with its own ups and downs.

No sugarcoating here: budgeting isn’t fun, and it isn’t easy. Unless you take control of your debt, you can expect it to escalate. We’ve pulled together some tips to making your credit card repayments more manageable.

• Pay more than the minimum repayment to get closer to a debt-free future faster.

• Decide on a set amount from each paycheck to dedicate to your debt and set it aside as soon as your pay comes in.

• Schedule automatic payments to avoid missing due dates and being charged late fees.

• Try to make extra repayments where possible. After all, the faster you pay off your debt, the less interest you’ll need to pay. This can be helped by: selling clothes or furniture you no longer need, funnelling in any bonus payments (from work or gifts), cutting out unnecessary spend - and redirecting the money into card payments.

If you need extra help working out your repayments for your current credit card debt, use Mozo’s credit card debt repayments calculator.

We’ve talked a lot about going above and beyond the minimum repayment on your credit card. But why exactly making the minimum repayment a bad thing?

Consider a credit card debt of $700, with a minimum repayment of $35 per month. If your card’s purchase rate is 17%, it will take you 2 years to repay that debt - assuming you don’t charge any other transactions to your credit card in that time. You’ll pay $129 in interest on top of the $700 you originally owed.

Take that same debt of $700, but double those payments to $70 each month. With the same interest rate of 17%, you’ll pay off your debt in 11 months. You’ll pay only $60 in interest, less than half the amount you would have with those minimum repayments (and less than half the time to pay it off!)

All that said, if you’re struggling to make payments, the minimum is still something. Don’t beat yourself up for keeping it to those minimum payments while you get control of things - paying off anything is making great progress.

There’s a lot to say about avoiding credit cards altogether, but the reality is that they can be extremely useful in this modern world. There are also smart ways to use credit cards when focusing on minimising debt and keeping your balance small.

If your debt is unusually high because of an unexpected circumstance or temporary setback, and you have a plan for your finances once you’ve paid it down, a balance transfer credit card can be a great way to help get debt to a manageable level.

Many balance transfer cards offer 0% introductory offers for a limited amount of months, potentially saving you a great deal. 

Imagine you have a $2,000 credit card balance on that same card with a 17% p.a. purchase rate. You are making monthly repayments of $100.

• On a regular card, this means you will pay off your debt in roughly 2 years and accrue $368 in interest.

• On a card with a 12 month 0% balance transfer offer, paid at the same rate, you’ll shave 3 months off your repayment. You’ll only end up paying $55 in interest, as the first year will be interest free. 

• On this same card with 12 months of a 0% balance transfer offer, you can pay $0 interest if you pay off your debt within the 12 months. If you make payments of $167 a month, you’ll have paid off the whole credit card balance with 0% interest.

There are many reasons not to let debt spiral beyond control. Not only can it cause significant amounts of stress, but it can also impact your credit history and make it difficult for you to do things in the future, like buying a house or borrowing money.

If you’ve acquired some debt, you might also consider debt consolidation loans or how to help repair your credit score.