Reducing Credit Card Debt In 2013

2013 New Years Finance ResolutionsIf reducing credit card debt is on your list of 2013 new year's resolutions, then you're making a smart financial decision. Now you just need to stick to your resolution so it can really make a difference to your financial future. You'll be happy to know that the New Year is a great time to make significant inroads into your credit card debt because of some great deals offered by the banks with balance transfers.

It's common knowledge that people spend up big in December for Christmas - often beyond their means and so it goes on the credit card. Reality hits in January and February when the credit card bills can't be repaid and suddenly you're looking at steep interest and fees that stick with you throughout the year and sometimes for many years. And so early in the year in particular we see banks offer introductory balance transfer rates.

The Benefits Of A Balance Transfer Credit Card

A balance transfer offer is like an introductory deal that banks use to entice you to switch credit cards. You can use these balance transfer offers in your favour to help you get out of debt!

Balance transfer credit cards usually have a limited introductory period from about 5 to 9 months with a very low interest rate.

Current Balance Transfer Offers

Because people are carrying extra debt after Christmas, banks come out with some very attractive balance transfer offers in the new year. Perfect for new year's resolutions in getting into financial shape!

Most of the Westpac Credit Cards currently have a deal with a balance transfer rate of 0.99% p.a for up to 9 months. So instead of paying $50 per month on a $3,000 debt, you only need to pay about $2.50 interest per month during that introductory period. The extra money you can put towards repaying the debt.

The Westpac offer is attractive because it's available on most of their credit cards and 9 months is a fairly long time to tackle getting the principal paid off. With balance transfers the longer the introductory period on a lower interest rate, the better. The Westpac offers are available until April 1st 2013 - but if you want to start saving on interest by transferring a balance, get onto it as soon as you can.

Virgin Money credit cards have also just introduced some post-Christmas balance transfer offers too. For example they have a 0% p.a balance transfer rate for up to 9 months on the Virgin Velocity Flyer credit card. There are other balance transfer offers (and bonus Velocity points offers) available with their credit cards at the moment too. The Virgin Money offers are available until March 31st 2013.

Pay Off The Worst Debt First

A smart piece of financial wisdom is to pay off your worst debt first. If you are carrying debt from multiple sources then you will need to decide which is the worst. Often it will be the consumer debt with the highest interest rate. But if it is a personal loan you will also need to consider any potential penalties that may be imposed for making extra payments or early repayment.

Although there are some low rate credit cards available, many people have debt on credit cards at a much higher interest rate. The cards with higher interest rates often have more perks to entice people in - like rewards programs or frequent flyer programs - and then are harder to repay because the interest rate is higher.

Case Study

So let's take an example of a credit card interest rate of 19.49% p.a. If you have $3,000 debt at 19.49% p.a then over 12 months you'll need to pay back almost $585 in interest. This is just less than $50 of interest per month. And if you don't reduce the principal amount of the debt (the $3,000) then you'll need to keep paying that interest month after month indefinitely.

That's also assuming that you don't keep adding to the debt each month. So firstly stop adding to the debt and ensure any current expenditure on the credit card can be paid off in full at the end of each month. If spending too much on your credit card really is a problem for you (the $3,000 of debt is a pretty big clue), then cut it up, bury it or put it in the freezer.

The faster you pay down the principal, the sooner you are going to pay off the debt and stop paying as much interest. Once you only owe $1,500, then your interest is going to be about $25 per month - and so it continues as you pay off your debt.

A balance transfer rate gives you the opportunity to significantly lower your interest payments for a period. This should be used as breathing space - not just to catch your breathe before resuming interest payments again. But to take proactive steps to reduce the principal amount of debt.

The Downside to Balance Transfers

Don't think the banks make these offers out of the kindness of their hearts. Banks exist to generate profits for their shareholders and so they are betting that you (or a majority of people carrying credit card debt) will still have credit card debt at the end of the introductory period.

Once the introductory period ends, then the rate will revert to an interest rate that is typically the standard variable interest rate or possibly the even higher cash advance rate, So any principal debt that you still have remaining will jump to a very high rate - at the moment around or over 20% p.a on many credit cards.

This is why making additional payments during a balance transfer offer period is a sensible strategy to improving your financial well-being. Debt consolidation could also be another strategy to reduce high interest repayments into lower ones - but the benefits will depend your individual scenario.

Don't Give Up

If one of your goals for 2013 is to improve your financial situation by paying off credit card debt, then a balance transfer credit card can be a great help. But even more importantly you'll need to be committed and disciplined to reach your goals - paying off debt doesn't happen by magic.

Some tips to keeping your resolutions are to set yourself a target that you will pay off each month. Possibly even pay off some of your credit card debts as soon as you get income. And remove temptation by destroying your credit card, giving it to a family member or friend and staying away from the shops.

Good luck in paying down your credit card debts in 2013!

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