There are situations when you are forced to take on debt while dealing with an unforeseen expense, or when you are out of work but have to cover for inescapable expense. Managing credit card expenses, is a much required financial discipline, especially in such instances.
Financial discipline is important because it helps to improve your financial well-being, and avoid financial stress. Credit card debt is expensive because you can continue spending on your card upto your credit limit, irrespective of the amount you already owe.
The most effective way to save money on credit card interest is to avoid credit cards!
Ways to manage Credit Card Interest
Evaluate your Credit Card Portfolio
Before you jump on the spending spree armed with your credit cards, it is recommended that you evaluate following being offered on your credit card.
- Terms & Conditions
- Credit Limit
- Annual Percentage Rate APR
- Grace Period
- Statement Due Date SDD
Pay early, Maintain low payable balances
The best way to avoid interest charges is to pay your credit card bill in full before the due date. Just paying the Minimum Amount Due MAD published on your Credit Card Statement will not save you from incurring debt. Pay as soon as possible, because CCI will charge interest on total unpaid balance after the Payment Due Date PDD is breached.
Maximum Grace Period, Lowest Interest Rate
Always include a credit card which offers you maximum Grace Period and lowest APR in your portfolio. If one single card does not offer both benefits, subscribe to more than one.
The Grace Period, which is a 'Interest-free' period, can help you avoid interest charges while you are organising funds to pay the credit card bills. At the same time, the lower APR will help you save on interest charges, if funds cannot be organised before Payment Due Date.
AVOID Cash Advances
Credit card cash advances typically have higher interest rates and no grace period. To avoid extra charges, avoid using credit cards for cash advances.
Prioritise high value transactions
If the high value transaction cannot be avoided, it is better to opt for a Equated Monthly Instalment EMI or Pay Later payment options, if available. Evaluate various payment options available for such spends, and opt for the one which charges the lowest interest compared toAPR charged on the Credit Card.
- Equated Monthly Instalment EMI: Look out for ZERO COST EMI options on credit cards offered by shopping portals. Many a times, the interest charged on EMIs may be nill or still lower as compared to the Annual Percentage Rate (APR) charged by your Credit Card Issuer (CCI).
- Pay Later: This payment option may not be on Zero Cost / Interest but at the end of the day you may end up saving on the differential interest rate when compared to Credit Card APR.
Transfer balances to the card with low APR
Now a days, some CCIs have started offering lower APRs as compared to their competition. You may review APR on various cards in your possession and opt for Transfer Balance facility offered by the CCI with lowest APR. While you will save some percentage rate of interest, it is still advisable, to clear your outstanding payables as early as possible. Before you proceed to opt for this facility, do check on the processing fees and any other applicable charges, and evaluate whether Transfer Balance option would be helpful.
Debt repayment method
If all the strategies mentioned above, are not feasible and making payment becomes imminent, opt for the Debt Repayment Method or Debt Avalanche which is a type of accelerated debt repayment plan.
With a debt avalanche, you make the minimum payment on each debt, then use any remaining available funds to pay the debt with the highest interest rates.
- Make an Excel sheet: List down all your payables in a excel sheet especially Interest Rates, Amount Payable and Payment Due Dates.
- Sort on Interest rates: Sort your list on the rate of interest being charged by various CCIs in Descending order i.e. Highest to the Lowest.
- Pay Minimum Amount Due MAD: Start by paying the MAD due on each of your credit card irrespective of the PDD.
- Prioritise payment to the Top of the list: Amount left should then be paid off to the credit card which features on the top of your list going down to the second or the third and moving further down on the list as per funds available at hand.
The advantage of the Debt Avalanche method of debt repayment is that it minimizes the amount of interest you pay in the long run. It also shortens the amount of time it takes to get out of debt (provided you make consistent payments) because less interest accumulates.
Debt Avalanche method requires discipline for consistency.
Debt Snowball Method
Another strategy to pay-off your debt is the Debt Snowball method, where you use the balance left after paying MAD across all your cards to clear outstanding payables from the cards with lowest balance to the highest.
Although the Debt Snowball method does not save in terms of total interest charges, it may offer more motivation by eliminating small debts more quickly.
Opt for Personal Loan
As a final resort, consider opting for a Personal Loan which allows you to pay your debts at a lower interest rate to ensure you do not end up paying APR charged by your CCI.
Bottom Line
At the end of the day, credit card interest is money wasted because it has no effect on the quality of your goods or your life. Infact it does drain your resources and makes it much more difficult to go ahead. Credit card interest can be avoided with financial discipline and wise choices. Remember these suggestions the next time you use your credit card to keep your finances in order.
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