What starts as a small amount of credit card debt soon becomes a major problem due to two issues: high interest rates and low minimum payments.
It’s common to find credit cards with interest rates above 10 percent, which means if you owe £3000 and your interest rate is 10 percent, you’re paying at least £300 in interest.
Credit card companies want you to have a high balance because it benefits them, and that’s why they make your monthly minimum payment as small as possible. However, making small minimum payments combined with a high interest rates means you’ll be making little headway in paying off your debt, and chances are you’ll end up owing thousands more than you did when you started.
Get yourself out of the cycle of debt by making more than the monthly payment. If you follow these five steps, you’ll be on a path to a clear financial future.
1. List Your Debts – Gather up all your credit card statements and combine them in a list. Write down your current balance, the interest rate, and the minimum payment.
2. Organize the List by Interest Rate – Put the card with the highest rate at the top. This is the one you want to pay off first. Then put the card with the second highest rate underneath it, and so on. The card at the bottom of the list should have the lowest interest rate.
3. Overpay Your Minimum – Total up all the minimum payments. This is how much you need to pay every month, but you want to pay more than just the minimum. Examine your budget and find ways to squeeze a little more money into your debt payoff funds. Even if it is just £20 more a month, you’ll make progress. Try to throw as much extra money as possible towards your debt. The faster you pay it off, the less money you’ll end up paying in the long run.
4. Overpay the Top Card –
You will still be making the minimum payments on all of your credit cards except the one at the top of your list. This is the one with the highest interest rate, which means it can double or triple in amount if you’re only making the minimum payment. Use all your extra money towards paying off its balance, and then focus on the next card on the list. Do this until you pay them all off.
5. Celebrate –
You’ve made some hard choices, but your debt is gone. Now you can concentrate on building up wealth and use that dedication you put towards paying off your debt to learn healthy financial practices. But throw a little party for yourself first. You deserve it.
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