11 November 2015

Is it time for a credit card rest?

As the summer season has come to a close, it seems that many of us may be left with a rather large credit card bill, as well as the remains of our tan.

With many people paying for holidays with plastic, and then using their card once abroad, credit card bills have increased. So if summer was the season for spending, autumn is the perfect time to have a rest from using your credit card and take steps to reduce, or even clear, any outstanding balance before the Christmas shopping starts.

Budgeting tips to help pay off your balance 

Whatever the total balance on your credit card is, it’s important to try and pay it off as quickly as possible so that you're reducing the amount you have to pay in interest. Use our budget calculator to work out how much money you have left each month after bills and essential spending. Remember to include your credit card minimum payment as you have to pay that each month.

Once you know what you’re left with, you can work out what extra you can afford to pay off your credit card each month and how long it will take you to clear your balance at this rate. It might be a good idea to set up a direct debt or standing order so you know the money will be paid each month.

There are also lots of ways you can save small sums throughout the month which you can then use to clear your credit card even quicker:

  • Take a packed lunch to work — even spending £3 a day, five times a week adds up to over £50 a month. Take a packed lunch and put that cash towards your bill instead.
  • Cut out your weekly takeaway — a night in may seem like the cheap option, but Vouchercodes.co.uk puts the price of takeaway, drinks and snacks at around £35 — save yourself £10 by cooking a curry instead.
  • Save 50ps or £1s — clear out your pockets/purse/wallet each week and put all the 50ps, £1s or both in a jar. At the end of the month make an extra payment on your credit card — you’ll be surprised how quickly they add up, and if you don’t have cash on you you’re less likely to buy that coffee or chocolate bar you don’t really need.
  • Say no — saying ‘no’ to any non-essential spending for a set period, whether it’s a week or a month, can save a surprising sum. Remember, if you’ve resisted that glossy magazine, post-work pint or new pair of shoes, transfer the cash out of your account straight away so it doesn’t get swallowed up by something else. The Impulse Saver feature on our mobile banking app lets you transfer money from your Nationwide current account to your Nationwide savings account without even having to login. And at the end of the period you can use any savings to help pay your bill.

And remember — while you’re trying to pay off your credit card, it's a good idea not to do any more spending on it. Try leaving it at home, or putting it in a separate compartment of your purse or wallet so you’re not tempted.

Savings in the bank v paying off your credit card

If you’ve got some cash in the bank it may make sense to pay off your debt in one lump sum, rather than making monthly repayments and accruing interest. Typically, the interest on your credit card bill will be higher than any interest your savings are earning. For example, a £500 credit card bill at 18% interest will cost you £90 a year in interest. However, if you had that £500 in the bank earning 2% interest you’d only earn £10 a year. So you’d be £80 better off if you used the cash to pay off your bill.

If you really like the idea of having some accessible cash for an emergency, why not leave your savings as they are, but direct any money you would have added to them in the next few months towards paying off your plastic?

The only exception is if you can transfer your debt to an interest-free credit card. This gives you the entire interest-free period to pay off your bill and you can leave your savings in the bank earning interest. But it’s important to look into the full details, as you’ll usually incur a fee for doing so. And remember, it’s important to fully pay off any debt before the interest-free period ends or you could face paying interest on any remaining balance.

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