How to Avoid Credit Card Debt

by : Edward Woodward

Credit cards. Most of us have one and some of us use it on a daily basis. But when the bill comes every month it’s easy just to make the minimum repayments to avoid having to pay bank penalty fees. This however could be a big mistake. Many people today prefer to use plastic instead of cash. Some use it almost every day to pay for small items like parking and takeaway coffees simply because it is convenient. Credit cards certainly make spending easier but it’s easy to lose track of how much you can really afford.

It is easy to think that you have money to spend when you have a credit card. And for some, even paying off their cards with the minimum amount each month is not always easy. This is a very familiar story for some, with credit cards now accounting for over $40billion worth of debt in Australia alone.

Credit can be a very attracting facility which enables you to spend just that little bit extra every month. According to the experts, one of the biggest mistakes credit card users can make is spending just that little bit more than what they earn. It’s an easy mistake to make because when the bill is delivered to us in the mail, we are only required to pay a portion of what we have spent, often as little as $20. People often look at this amount and think that as long as they pay back the amount each month this will settle the debt. But this is far from the case. The reason behind this is that whilst interest rates continue to rise, in most cases, the minimum repayments have remained the same.

Making only the minimum repayment can have a little or no effect on your actual debt owing. While your interest rates have gone up, your minimum repayment hasn’t so the impacts of those payments are not effective. It doesn’t help to reduce the debt and the debt remains the same, and for some cards, the debt actually increases even though you are making the minimum repayment required.

With banks failing to adjust these minimum repayment amounts, it’s up to you, the consumer, to monitor interest rate rises and make any necessary adjustment to your payments. It is also important to be aware of what your interest rate is and how your minimum repayment compares to your interest rate. Paying just the minimum is not ideal. For example, paying just the minimum on a $10,000 bill could take 40 years to pay off. This means you would have to pay 26,000 worth of interest on only a 10k debt.

The key is to spend only what you can pay off at the end of the month. It’s important to learn how to budget. You can start by:

  • Adding small amounts to your minimum repayment

  • Putting any spare cash directly onto your credit card bill

  • Refusing any offers to increase your credit limit

  • Get a low rate credit card

For more information on how to use your credit card visit credit card comparison website