The Accession Finance $10K Challenge - Week 4
This week we're getting a bit personal. Is it time for the SNIP?
On the 1st of January this year, I cut up my credit card.
Our spending background: we had accumulated credit cards with various limits, and in fact we found out recently that it was COMPULSARY to have a credit card with the home loan that we were on. Every month, we put almost every expense on the credit card and every month we would pay it off in full- making use of the interest free period that you are granted, and gaining points on the card to earn freebies.
In theory, this was a great system. In reality, we lost complete track of what we were spending. Because it was near impossible to spend the balance of the credit card (and don't worry - I've had a few good cracks at it!) the balance would get higher and higher until it crept up to almost what we were being paid.. and of course you can't put your mortgage on the credit card so that is when I knew it was time to cut up the credit card and find out where the money was going.
If you have a credit card, and you dont pay the balance off every month, you are likely paying between 10-15% interest per year. This is VERY high.
If you don't have a big chunk of savings behind you, and if you don't pay your card off every month, then saying 'cut the credit card up' just isn't going to cut the problem... but it is a good start.
Here is my get out of debt credit card strategy:
1. Cut up the credit card - this stops the problem from getting bigger
2. You need to ensure that all of your direct debits that are automatically charged to your credit cards are allocated elsewhere - cancel anything you're not using, reallocate anything else to your bank account if this is realistic for you. Before you close the card - make sure that you are not depending on it for travel insurance and some cards let you use credit card points to offset their value on the card- this can be a great way to clear off a little of the debt.
3. Transfer the balance to a ZERO interest credit card, balance transfer. There may be fees associated: a transfer fee (usually a percentage of the balance you wish to transfer) and an annual fee to have the new credit card that you are transferring to that needs to be paid every year. Try to find a card that has a zero annual fee and a zero balance transfer, a quick google search on a credit card comparison website uncovered one that I could find - it had a very high interest rate of 14.99%... but that doen't matter because...
4. When your new credit card arrives, you cut that one up too. Usually when you arrange a balance transfer- you will be immediately charged interest on ANY new purchases you make - until the balance transfer is paid off. THIS IS WHERE THEY GET YOU. DON'T USE THAT CARD!!!
5. You now have an interest free period on you balance transfer. Divide the balance that you transferred into the interest free period.
For example: if you have an interest free period of 12 months and you transferred a $6000 balance you calculate it as follows: $6000/12 = $500 per month. If you can afford to pay it off sooner or make bigger repayments, then do it.
6. In 12 months you should be credit card debt free and after that you'll have an extra $500 in your budget! In the meantime, you will have saved up to $900 on your $6,000 credit card debt and you (hopefully) won't be spending outside your means.
If this doesn't seem like a realistic approach to you - if you don't have the income to cover the repayments that you need to pay off your credit card debt, then you could look at debt consolidation via your local friendly mortgage broker (that's us!) and we can talk you through your options. Call 0434 494 656 to have a chat over the phone.
Now it wouldn't be fair for me to claim a saving on this one - because we did pay our credit card off every month before we were charged interest, but I'm hoping that if there's anyone out there that does pay interest that this can be one that helps you.
Week 1 - Insurance $190 saved
Week 2 - Gifts/Fun Memberships $388 saved
Week 3 - The $10 Sacrifice $520 saved
Week 4 - Time for the Snip $ 0 saved
So far in 4 weeks we have made changes that will have saved us $1098 by the end of the year. We are already over 1/10th of the way to our goal of $10,000. Last week we heard from Emma who saved $6K after reviewing her insurances! When we set out on this challenge, we were doing this for ourselves but knowing that we are making a real difference to Melbourne families makes it all worth it!
See you next week,
General Advice Disclaimer:
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs. This information is based on our personal circumstance and it will be different for everyone. Information provided on this website is general in nature and does not constitute financial advice.
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