Caught in the credit card interest rate cycle? Here’s how to break free
The interest rate is a significant element of any credit card and it can have a huge impact on your card’s monthly balance and the associated repayments - something that you want to avoid or eliminate. While having a credit card offers you the convenience of not having to pay for your purchases immediately, unless you’re able to pay the closing balance each month, you’ll pay interest on those purchases - and the longer it takes for you to pay off your balance, the higher your interest charges will become. In some situations, you can even end up having to pay more in interest than your actual purchases.
But if you are caught in your credit card’s interest rate cycle, here’s how to break free by paying off that balance once and for all.
Personal loans
One option is to pay off that credit card debt by taking out a personal loan. Not only will this help you to get back in control of your finances, the interest rate you’ll pay may be lower than a credit card, particularly if you are only paying the minimum payment each month. You will need to compare the costs of this option by considering the fees, charges and interest rate. By taking out a loan to pay off your credit card’s outstanding balance that has a lower interest rate, you’ll save on interest over the long term and your monthly repayments could be lower too. And, if you’ve fallen into the trap of having multiple credit cards that you can’t pay off, consolidating those debts into a single personal loan makes your life a whole lot simpler - as you only have to make one regular repayment each month rather than juggling multiple payments.
Another benefit is that you don’t have to worry about the interest rate compounding in the future. That’s because your personal loan comes with fixed weekly, fortnightly or monthly payments over a fixed term (and you can always pay more if you want to reduce the debt faster).
With just one repayment amount to focus on, you’ll soon get in to the habit of making regular payments and that balance will be paid off in next to no time. Just don’t slip back into your old habits with those credit cards and you’ll be able to break that high-interest rate cycle.
Balance transfer credit cards
If managed correctly, balance transfer credit cards could significantly help you to reduce your credit card debts, and potentially reduce the interest you have to pay as well. Balance transfer credit cards are specifically designed so your existing credit card’s outstanding balance can be transferred from your old card to your new card. Many balance transfer credit cards offer 0% interest for an introductory period, which could be anywhere from 6 to 24 months.
This might sound great but the minute you use that new card to buy stuff, you’ll start paying interest on those purchases, and it will keep accruing until the old balance is paid off. That’s because any payments you make always go towards the oldest debt (in this case, the balance that was transferred from your old card), meaning that any payments you make won’t go towards your new purchases until the old debt is completely paid off. Balance transfer offers are great – so long as you make regular payments and never use the card for any purchases.
It’s also easy to get caught in a cycle of balance transfers from one card to another as the introductory period of 0% interest expires. While this might sound like a good strategy, be warned - applying for multiple credit cards may affect your credit score.
Stop using that card!
The best way to break the interest rate cycle is to stop using your credit card completely until you’ve paid off the outstanding balance in full. If you’re a credit card addict, you might find it pretty difficult to resist the temptation to tap the plastic, so you could try switching to a debit card, or even using cash for a while until you’ve freed yourself from those debts. When you stop using your credit card, the interest won’t pile up, and this will help you catch up with your payments until you’ve completely paid it off. Remember, the higher your balance is, the higher the interest charges get.
Ditch the auto-charges
One thing you have to keep in mind once you’ve decided to stop using your credit card is to unsubscribe from anything that has recurring payments automatically charged to your credit card. Some of these auto charges may only bill on an annual basis so it’s a good idea to go back through 12 months of credit card statements to see what is being billed on a subscription or automatically renewing basis. You may just be surprised how many things you’re paying for that you don’t use any more or that you just don’t want to continue with.
Break the cycle now!
Credit cards can be a good ally for your finances, especially in times of need. There are perks, such as rewards, cashback or airline miles that make them seem even more attractive. But if you’re not paying your closing balance in full each month, the accumulated interest charges can get you caught in the cycle, and before you know it, your finances are out of control.
If you're not keen on using a credit card for those unexpected expenses, don’t worry, we’re here to help. Just check out our cash loans from $1,000 to find out how quick and easy it is to get your hands on some extra funds. Once a loan is approved, we can usually deposit the cash into your bank account within a few hours - so you could start to break free from that credit card interest rate cycle sooner than you think!