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Debt Management

How to reduce credit card costs and  Making your budget work

How to reduce credit card costs

Credit cards are handy to have. But if you've ever looked at the interest rate credit card companies charge, you know they're an expensive way to borrow.

That's why it makes good financial sense to cut down on credit card costs. When you carry a balance on your cards, you may be paying more than three times the going rate for a conventional loan from a financial institution - especially with cards offered by retailers.

A typical major department store credit card may charge an annual interest rate of 28.8%. Financial institution credit cards such as VISA and MasterCard were charging up to 18.5% at the time this column was written.
Obviously, it pays to avoid credit card debt entirely. But if your credit card balances have grown too large to handle, here are a few tips for getting them under control:

Plan a payment strategy. Start by curbing your spending on unnecessary items and put the savings toward your credit card bills. If this means removing the temptation to spend by not using your credit cards, so be it. Put your cards somewhere where you can't get at them easily - in your bank safety deposit box, for example.

Refinance your debt. Consolidate your credit card debt by taking out a lower-rate loan from your financial institution. Use the loan to pay off your credit card balances. At today's rates, you'll save in interest charges and pay down your debt faster. If you have a secured line of credit, your rate will be even lower.

Pay credit card debt first. If you have other debts, pay off your credit cards first. In the case of that expensive department store credit card, every $1,000 you pay saves $288 in yearly interest. If you don't pay the balance and you're in a 50% tax bracket, you'll have to earn $576 before taxes to pay a year's interest.

If you compare paying down your credit card debt to investing, you'd have to earn an annual before-tax return of 57.6% to make up for the money you'll pay on a high-rate card.

Avoid retail cards. If you must use a credit card at a department store, use a lower-rate VISA or MasterCard.
Avoid premium credit cards. You can save on credit card costs by sticking to basic cards that charge low annual fees or no fees at all. Many institutions also offer no-frills, lower-interest credit cards. If you don't need all the bells and whistles that come with many credit cards these days - such as purchase protection or airline points - check these out.

Once you get your credit card balances under control, prevention becomes the best cure. To help ensure that you don't run up big balances, leave your cards at home when you shop. You can also reduce the number of cards you have or ask card companies to lower your credit limits.

Making your budget work

Many people abandon budgets even before they start to track their expenses. They find the budget too rigid to live up to or the record-keeping too much trouble. This is unfortunate because a budget can be as simple and as flexible as you choose. What is important is not tracking every penny you spend, but creating a plan that works for you.

The benefits of budgeting are many. It helps you match future income with expenses and it helps you keep track of where your money is going (thus eliminating a major source of arguments for many couples). Most important of all, budgeting helps you save for emergencies and investments.

Creating a budget. First, pick a time frame. Monthly is the most common choice, but you could make it weekly or quarterly if you prefer. Next, get together current financial information such as pay slips, bills, your cheque register and credit and debit card statements.

Now calculate your total gross income. Include your salary or self-employment income, as well as any periodic income you receive from sources such as investments or property. It is wise to be conservative, leaving out hoped-for raises, gifts and windfalls.

Now calculate your total deductions. Include income tax and other deductions made at source, such as CPP, UIC, group insurance premiums and pension plan contributions.

After you have compiled these numbers, calculate your total expenses. Be liberal and break them down into these three categories:

  • Fixed regular expenses, such as mortgage payments;
  • Flexible regular expenses, such as utilities, food and clothing; and
  • Flexible irregular expenses, such as gifts and entertainment.

At this point, you should decide on what you hope to save and what you hope to invest. Make sure these are realistic and attainable, based on your surplus of income over expenses.

Now you have a draft budget. Monitor your actual income and expenses against the draft numbers for a test period of about three months. If they are seriously out of whack, adjust the draft before finalizing your budget.

Continue to monitor your actual income and expenses and compare them with your budget on a regular basis. This will allow you to identify and correct problems, such as overspending on credit cards. It will also permit you to adjust your budget to reflect raises, annual increases in utility rates and the like.

It takes perseverance to make any budget work, but your time and effort will be more than repaid as you begin to take control of your finances, plan for the future and put money into savings and investments on a regular basis without worrying about whether you'll have enough cash to cover your living expenses.

Here are some quick tips for successful budgeting:

  • Make sure all family members are involved in the process;
  • Use a computer program or a ledger book to keep records, whichever suits you better;
  • Try broad expense categories, to avoid getting bogged down by detail;
  • Create an emergency reserve for unexpected expenses, like a new roof or major car repair;
  • Overhaul your budget in anticipation of major lifestyle changes, such as buying a house, starting a family or retiring;
  • Don't let short-term deviations from your budget discourage you.