Firstly, if you’re in the midst of credit card debt it’s important to understand you’re not alone. 27 million people in the UK struggle with credit card debt (Unbiased) and no matter how difficult a position it feels, with concerted and consistent effort there are ways to get out. Below we touch on just 5 ways you can start working towards a better relationship with credit, some provide immediate value while others are longer-term commitments but together can do wonders.
None of the below is financial advice and we recommend speaking to a financial adviser to determine the best option for your financial situation, but these top tips can help you take action today if that’s not an option:
1. Create a budget
Being able to manage your finances starts with understanding them, and this is where employing a strategy that has been around for centuries can help: a budget.
There are 6 key steps to creating a budget:
- Calculate your income:
This includes the salary you earn, commissions, bonuses and any other sources of income you get that are on a regular enough basis that you can rely on them - Track your expenses:
This includes everything from rent and groceries to transportation and entertainment. You can track your expenses using a budgeting app, a spreadsheet, or even just a notebook. - Categorise your expenses:
This will help you understand how your income breaks down each month and where it’s going. In this stage, you need to be completely honest with yourself about your spending and hold no judgement against how you’ve spent in the past but instead make a commitment to the future you. Once you’ve categorised the ways in which you spend money you can start to identify what are necessities e.g. housing, transport, groceries, debts, and what are variable expenses e.g. entertainment, eating out, personal care, shopping. - Set financial goals:
By this step, we know how much we’ve got coming in, how much is going out and where. Now we need to think about the future and define what all this effort will be for. What do you want to achieve with your budget? Do you want to save for a down payment on a house? Pay off debt? Build an emergency fund? Once you know your goals, you’re much more likely to stick to a budget because the perceived changes to lifestyle now are in favour of building a future you want, not just for the sake of change.
When you have the goal in mind, it can also help to convert it to a timeline to give you a tangible future date to work towards, for example, if you’re saving to buy a home then Nude (www.getnude.com) is a great way to visualise that goal and figure out how long it’ll take you based on different saving amounts. - Create a budget:
Now we bring it all together, sometimes it can be easier to create a budget summary page that includes your income, expenses, and financial goals that you can flick to in a single view. Then have a secondary page that goes into the detail of each category, how much is allocated to necessities and how much you’re allowing for variable expenses which will be based on how long of a time period you want to achieve your goal within. - Stick to your budget: Arguably the most important step. It can be tough to stick to a budget at first, but it gets easier with time. You can make your life easier by automating your savings and bills where possible, if you’re a user of Monzo for example it can help to use the Monzo Pots feature to separate your money into different pots for each category of your budget. Blocking regular progress check-ins into your calendar to create a habit regularly can also be helpful.
But ultimately this step is all about keeping yourself accountable to your future self who is debt-free or living in that dream home or stress-free knowing they have an emergency fund in place. A budget isn’t there to constrain your life, it’s there to help you unlock a better one.
2. Pay more than the minimum payment on your card balance
When you apply for a credit card and get accepted, there are various terms and conditions you’re agreeing to, one being that you will at the very least pay a minimum amount on your card each month. This number is determined by the total balance you have on your card in that billing period. But paying just the minimum amount on your credit card each month is a common trap. It's true that you'll be chipping away at your debt, but you might not be making as much progress as you think. That's because a portion of your payment goes towards interest, not just the principal balance.
The higher your interest rate, the more of your payment will go towards interest. So even if you're paying the minimum, it could actually take years to pay off your debt. To counteract that, the best way to get out of debt faster is to pay more than the minimum each month. Even if it's just an extra £5, it will make a difference.
We know it's not always easy to make extra payments, but it's worth it in the long run. It can also feel like such a small amount extra is wasted on paying down debt as you don’t see any tangible value, but when you're debt-free, you'll have even more money to save and spend on the things you love.
3. Switch to a better deal
Changing your credit card may not be a top action that comes to mind, but it can be a significant saver for you. According to research by Experian, two-thirds (68%) of people in the UK could save over £1,000 a year on interest payments if they switched credit cards.
It’s common for credit card companies to have introductory offers such as 0% interest for the first 12 months, which is great because, for the first year, you won’t have to pay any interest on your balances. But this can be a trap people fall into by not tracking when the introductory period expires. A useful and purposefully built product that can help in this situation is a balance transfer credit card which typically allows you to move an existing balance to a new card with a similar introductory offer. This extends the period of time that you won’t be paying interest as well as gives you breathing room to pay down your debt - phew!
It’s important to note, a tool such as a balance transfer credit card can be a fantastic way to avoid interest fees on the path to paying down the balance. But you need to play an active role in managing your debts and ensuring you’re not continuing to grow your balance on the new card.
4. Stay motivated, don’t be too hard on yourself and take the small wins
Financial freedom is a destination and the journey can be emotionally draining. It isn’t linear, takes time, and effort, and can easily feel like the progress you’re making isn’t big enough. To combat this, it can help to set smaller goals on the path to make the gap between big milestones more tangible and seeable e.g. rather than saying you want to clear your balance of £1,000 by the end of the month, think about it as reducing your balance by £250 each week. This way the goal is less daunting, and progress is visible and more frequent thus making it feel real. This also gives you flexibility and control to course correct if needed, if one week you can’t save as much then you can adjust the other 3 to account for that without being knocked off the target entirely.
Lastly, give yourself a break. This takes time and every step, no matter how big or small, is a step in the right direction
5. Download Incredible and make life a little easier
We’re obviously biased but who doesn’t love a cheat code that gives you superpowers? With Incredible you can make the process of tracking, managing and paying your debts easier because they’re all visible and payable in a single place. It can be difficult, in some cases overwhelming, to know where the best place to allocate your money is when it comes to paying down debts. With us, it’s not. We’ve created a smart algorithm that determines exactly that on the fly, to give you insight on how to maximise interest, and time, savings from month to month.
The path to reaching your financial destination can be a long one, and walking is a proven way to get there, but why walk when you can fly and avoid the typical pitfalls along the way? If you want to supercharge your journey, join hundreds of others today and download the Incredible app
