The Story
December was fun and January is paying for it. If you are suffering from a credit card hangover, there could be a way to buy some time and reduce your fees.
About fees
You know those three letters you ignore when you apply for a card – APR - this stands for Annual Percentage Rate. It tells you how much you’ll pay to borrow money for a year. It includes interest as well as any other charges. For example, a 19.9% APR means you will pay £199 a year for every £1,000 you borrow. Ouch!
MOXI Tip: Whilst APR is useful, monthly interest is more relevant when planning to pay-off a card. You can find this on your statement. Your monthly fee will be your outstanding balance multiplied by the monthly interest. For example, a 1.5% monthly interest on a £1,000 balance means the fee is £15 (0.015 x £1,000).
How to buy time and reduce fees?
Credit card companies are competing for your debt because they want to collect your fees. In return for transferring your debt to them they are willing to offer you an interest free period. Which means you will have time to payoff your credit card without accruing interest. What’s the catch? You need to pay a one-off transfer fee which is a percentage of your balance. For example, if you transfer £1,000 to a new card and the transfer fee is 3% you will pay £30.
How do you know if this will save money?
Transferring is only a good deal if you can payoff your debt in the interest free period AND the transfer fee is less than the charges you will pay by staying put. To get an indication, you can compare your current monthly interest fee with the transfer fee.
Gimme an example
Say the monthly interest you’re paying is 1.5% and a new card is offering 12-month interest free with 3% transfer fee. You can quickly see that two months of not paying towards your current credit card – two lots of 1.5% - equals the transfer fee. So in actual fact, the new card is providing you with an extra 10-months to payoff your card without fees.
Anything else?
Always check APR of the new card because if it’s much higher than your current APR and you are unable to payoff in the interest free period then you will get stung.
How can you budget to payoff in time?
Take the amount you owe and divide it by the number of interest-free months. This is your monthly credit card payment goal. To reach this goal, you need a daily budget. Here’s how you work that out:
1. Add-up your monthly essential. Think: Rent/mortgage, travel, home bills, …
2. Subtract these from your salary
3. Now subtract your credit card payment goal
4. Divide the remaining amount by 31. This is your ‘do as you please’ daily spending money.
Need to know more on budgeting. we have a guide for that.
What if your daily budget is too low?
You could creatively look for free things to do like volunteering (which is good for the soul and your bank balance) or give-up booze and eating out for a few months. If that sounds like hard work, you could cut some of your monthly essential such as subscriptions or cycle to work instead of paying for the tube or petrol.