5 tips for putting credit cards on a leash
Starting with Black Friday in November and ending with Boxing Day in December, the holiday spending season is just about guaranteed to stretch the use of your credit cards. And come the end of January, you may be singing the credit card blues. You’re in a credit card crunch when you have multiple credit cards that you are unable to pay off in full and are having difficulty making minimum payments on some or all of them. You’re way past the “crunch” stage if creditors are sending past-due letters, calling you, or showing up at your door or place of work. Here are some tips on how to put a leash on your credit cards.
If you’re juggling credit card payments and living from paycheque to paycheque to make payments, try to pin down what you’ve been using your credit cards for. Have you made several large one-time purchases, for example, appliance or furniture or home renovations or some sort of emergency? Or do you use credit cards on a whim or impulse for fashions, cosmetics, dining out, entertainment, even a daily latté or two? If your credit card crunch is the result of the latter, you’re engaging in bad borrowing behavior and you need to make some drastic changes.
Paying off large credit card balances that you’ve carelessly run up might at first seem an insurmountable task. But after you’ve put the brakes on your bad borrowing habits, and freed up some extra funds for the month, there are a few tactics you can use to start chipping away at the debt mountain.
1. Make the minimum payment. Start paying the minimum monthly payment on each card. Add an additional amount beyond the minimum to at least one card with the highest interest rate.
2. The zero-interest balance transfer promo. Consider transferring a high card balance to one of the zero-interest transfer promotions that start appearing in your mailbox at this time of the year. You could get breathing room of as much as six months to a year with no interest. (There’s usually a nominal fee on the balance transfer of up to 3% of the principal.) Any payments you make would go directly against your principal amount. But if you go this route, be sure to check terms and conditions after the interest-free period expires.
3. Switch rates…for a fee. Talk to your credit card company (often your bank) to see whether you are eligible for a premium card. You’ll pay an annual fee, but the interest rate charged on these cards can be less than half that charged on no-fee cards. If you have large outstanding balances, what you spend on the annual fee (anywhere from $99 to $150 per year) will be offset by savings on compounded interest payments.
4. Line of credit. This is a tricky one. If you already have a personal line of credit, and if you haven’t maxed it out too, you might consider paying down some of your credit card balance using your line of credit. Interest rates are considerably lower on lines of credit, so you’d be reducing the overall interest rate hit. On the other hand, if it’s a secured home-equity line of credit, you in effect have a second mortgage on your home. If you don’t pay that as stipulated, the bank can seize your home. Use personal lines of credit sparingly.
5. Loan consolidation. Another tactic is to speak to your bank about a loan consolidation. In other words, you’ll be taking out a personal loan at a lower interest rate to pay off other higher-interest credit-card loans. Your bank’s loan officer can work out a payment schedule to fit your budget. But you’ll have to make a promise to yourself to lock away all but one (preferably low-interest) credit card until that personal loan is paid off.
And don’t use “point collection” as an excuse or rationale to avoid getting out of the credit card crunch. Loyalty points are worth far, far less than the high interest credit companies charge on credit cards. Credit card companies know this, and trade on it. For example, Visa Inc., the world’s largest credit card company, reported net earnings of US$9.94 billion in fiscal 2018. Lending is lucrative; borrowing is not. Don’t play the game! If you’re a points addict, use non-credit-card-affiliated programs only until you’ve dug yourself out of the hole.
And finally, if you are receiving past-due notices, dunning letters, or calls from collection agencies, you could be in over your head. In this case, you need to consult your banker or other financial or legal professional for some practical loan payment advice and some serious financial planning.