As the world evolves into a cashless society, there has been a significant increase in the use of credit cards. According to TransUnion, the average Canadian carries 1.4 credit cards and as of September 6, 2022, the current average credit limit rests at $5,800.
With a sky-high interest rate of about 19%, credit cards are an expensive way to pay for things if you don’t pay your balance off in full each month. If you find yourself racking up credit card debt and unable to pay it off, you’re not alone. Follow these tips on how to reduce credit card debt.
- Start with one. Choose one credit card to pay off first depending on your short-term goals. If the goal is to pay off one card completely, start with one that has the lowest balance while keeping up with minimum payments on your other cards. If your goal is to boost your credit score, start with the one with the highest utilization rate. You can determine this rate by dividing the balance on it by the card’s credit limit. Your credit score takes a hit every time you use over 20% of your available balance, so reducing the utilization rate by even 20% could increase your credit score significantly. If your goal is to reduce credit card interest, pay off the one that charges the highest interest first.
- Apply for reduced interest rates. Sometimes, a phone call is enough to have your credit card interest rate reduced. If you have a good credit score of 730 or above, your credit card company may be willing to drop the interest rate, making it easier – and cheaper – for you to pay off your balance. Long-time customers who pay on time can also get their interest rate reduced by a percentage point or two. This seemingly small margin can add up to an annual saving of hundreds of dollars.
- Transfer your balance – but exercise caution. Many credit card companies offer new clients a 0% interest rate for upwards of 6 months if you transfer your balance to them. Transferring your credit card balance can save you hundreds of dollars a year, but only if you make a commitment to paying off what you owe within the introductory window during which low interest rates are applied. Should this window close before you have cleared your balance, the interest rate will go up and you may end up owing more than you did to the company you transferred from. You will also need to avoid swiping this new card because low interest may not apply to new balances or purchases. You should also know that you may be charged a balance transfer fee of about 3 to 4% of the total transfer amount. Do your research when considering this option to determine if it will actually save you money.
- Make at least two minimum payments every month. Credit card companies usually charge interest daily, so the sooner you make a payment towards your credit card debt the better because you reduce your average daily balance and the interest it accumulates. Even on a tight budget, pay the monthly minimum and try to do so again in two weeks until you pay off the debt completely.
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If your money situation is a mess and you’d like to learn what it takes to be financially well, our proactive budget mentoring service might be just the support you need. Contact our accredited credit counsellors today for a free consultation.
