Tuesday, April 22, 2008

How we're reducing our credit card debt

Like thousands of other families, we are trying to reduce our credit card debt. In An introduction to credit card woes I mentioned that we have tried this before, but this time I feel like we're actually going to do it. Here's why.

The first thing we did was sit down together and decide that we would not use credit any more. This was hard. It took a bit to convince The Thinker. He is the risk management guy - what if the fridge dies or something. But we have money in savings for this sort of thing now, so there is no need to have a credit card. I think one of the reasons our attempts have fallen over in the past is that we never made a firm commitment to stop. It was always something like: put the bills and essentials on credit and cash/EFT for everything else. Before we knew it the credit card was being whipped out for everything again and no inroads into the balance reduction were being made.

So the credit card is no longer an option. We researched transaction accounts with debit card access (most banks have one) and opened an account that suits our needs. We now use a debit card for most of our requirements. This means that when we purchase something, we can still hit the “credit” button, but the money is actually coming from the cash in our account - no more credit. We can still do online and telephone purchases, all the things that we did with a Visa card, but we are not going into credit for the convenience.

We have also transferred our existing credit card balance to a 0% credit card account. Note that when you do a balance transfer like this, the 0% has a limited life span and then the interest rate shoots way up again. It is important to make sure you have as much of the balance paid down as you can before that happens. Ours will go up in 6 months, so I've divided the balance by 6 and have budgeted to pay that amount each month.

In order for this to work, we HAVE to follow a budget. I think this is another area where we have fallen down previously. We have set up a realistic budget, that includes plenty of sanity money and of course, the credit card payment. I track it religiously. Everything's on the computer, so it only takes a few minutes to download transaction details from the bank each week and reconcile it with our details. We've had to review the budget a couple of times, because life happens and things come up. But we always manage to shuffle things around and keep paying the credit card down.

This time I feel really positive about our progress. This in turn is helping to keep me focussed on the end goal and stopping me from making the unbudgeted purchases that always send things awry.

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