Keeping Your Credit Cards Under Control

Date posted: March 13, 2017
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Keeping your credit cards under control

Keeping your credit cards under control

By: Sarah Munn

Credit cards – we love ‘em, we hate ‘em, and sometimes we don’t know how to handle ‘em. There are different schools of thought out there about how to manage credit card debt, and it can be tough to know which is the right thing to do – is it better to pay the entire balance, the minimum, or somewhere in the middle?

Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada, Inc., shares his advice.

Ideally, he explains, the goal is to carry as little high-interest-rate credit card debt as possible, meaning if you have to carry debt, it’s better to carry it on low-interest-rate credit products such as a mortgage or a secured line of credit, but this ideal isn’t always within reach. In that case, the goal becomes trying to minimize the amount of month-to-month debt you’re carrying, and the best way to do that is to have a strategy to pay down your debt efficiently and regularly.

Paying the minimum on your credit cards is the very least you should be doing, and you should be doing it regularly, as this contributes to your payment history, which affects your overall credit score. But only ever paying the minimum is not beneficial in the long run, if you want to get out of debt.

“That’s called being on the ‘forever and ever’ plan,” Schwartz says.

Option 1: Pay down the one with the highest interest rate first.

This is a practical way of attacking credit card debt, by tackling the worst offender first and focusing on whittling it away. Say you have debt on three credit cards, this method would suggest you pay the monthly minimums on the two with the lowest interest rates, while also paying as much as you can manage on the one with the highest interest rate, i.e. the most damaging piece of debt, so that you get it out of the way as soon as possible.

Option 2: Pay off the one with the lowest balance first.

With this method, you would focus on paying as much as you can manage on the card with the lowest outstanding balance, while simultaneously paying the minimums on your other cards. This school of thought appeals to our “checklist mentality”, Schwartz explains. We feel good about (and are encouraged by) progress, and being able to pay off an entire credit card certainly feels like a step forward.

To choose which method to use, you’ll have to think about how determined you are and what works for you.

In addition to choosing a method for how much of your credit card balance to pay, he explains it’s crucial to create S.M.A.R.T financial goals to manage and/or stave off debt. Popular in the finance industry, S.M.A.R.T refers to goals that are:

Specific, Measurable, Achievable, Realistic, Timely or have a Timeframe

3 Tips for Managing Debt

  1. Create a budget: We’re often reluctant to create budgets – perhaps because we don’t like our freedom being taken away and we feel like a budget will limit us. But actually, Schwartz says, a budget is liberating.

    “A budget is no more than a snapshot of what your personal finances look like at any given time.”

    Having a budget falls right in line with those S.M.A.R.T goals and helps you exercise your financial freedom by enabling you to make more informed choices – does this purchase align with my financial goals? Do I really need that coffee or restaurant meal?
     
  2. Ask for a temporarily lower interest rate: In some cases, it can be worth it to explain your current situation to your creditor(s) and ask if they’d be willing to temporarily lower your interest rate.
     
  3. Set up an emergency savings fund: Schwartz also suggests making an effort to regularly put money into an emergency savings fund, even if it’s just five dollars a week. A great way to do this successfully is to set up an automatic deduction from your paycheque, so that when you deposit your pay, a certain percentage is taken off immediately and put into a savings account, before you even notice.

“You almost want to make it invisible,” Schwartz says.

This out of sight, out of mind approach essentially forces you to save without having to think about saving. It’s relatively easy to make the remaining amount last until your next paycheque because you won’t really miss the small portion that you didn’t actually see get deducted when your pay was deposited.

Changing our financial behaviours, like any habits, is hard, so set your S.M.A.R.T goals and stay focused. Ultimately, Schwartz says, “the key to having success around this is small steps.”

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