Paying interest on a credit card can be a costly experience. The interest rates charged on credit cards are often significantly higher than those on other types of credit such as personal loans, which makes credit cards a relatively unappealing means of borrowing.
However, with the cost of living continuing to rise and wage growth having been low for many workers in recent years, credit card debt is fairly common. As such, here are three ways in which consumers could cut their interest payments in order to boost their finances.
Balance transfer
Perhaps the quickest way to reduce the amount of interest paid on existing credit card debt is to obtain a balance transfer credit card. The vast majority of an individual’s existing credit card debt can be transferred to a new card that does not charge interest for a set period. The 0% interest period can be as long as 32 months, which should provide a significant amount of breathing space.
Not paying any interest on existing debt may allow it to be paid back sooner than it otherwise would have been. For example, a consumer with £3,000 in credit card debt paying 18.9% interest and repayments of £150 per month could clear their debt four months sooner and save £570 in interest by switching to a balance transfer card.
Note that there are sometimes balance transfer fees to consider; however, the fees are likely to be far less than the interest that would have been paid over the duration of the 0% balance transfer period.
Interest rate ranking
Some consumers may have debt on more than one credit card. This could mean that they are paying different rates of interest on different cards, and that it becomes difficult to work out exactly what is owed and when.
One potential solution to this challenge is to list the different interest rates being charged on the various cards. Paying off the debt on the card with the highest interest rate first is logical, since it may reduce the overall average rate being paid on all of the debt.
Furthermore, if an individual has other forms of debt, such as a personal loan, it may be worth finding out whether it is possible to take a payment holiday in order to pay down credit card debt faster. Personal loan debt is usually subject to a lower interest rate than credit card debt.
New purchases
Consumers who have existing debt that they are likely to increase in future may want to consider a card that offers a 0% interest rate on new purchases. At the time of writing, a number of cards offer such a feature, although it is sometimes limited to a specific number of weeks/months after account opening.
Having another card that does not charge interest on new purchases could be a worthwhile step for individuals who are expecting to make a large purchase in the near term. It may save them a significant amount in interest costs and help to increase the proportion of total repayments that are directed at reducing the balance of the loan rather than servicing it.
