So many people think credit cards are to be avoided completely when you’re trying to get out of debt, when in fact they can be one of the best tools you have at your disposal.
Essentially the main point to remember is that unless your credit card offers you one of the two benefits below, you shouldn’t really bother with credit cards.
If you aren’t much of a reader, I have also embedded my youtube video at the bottom, although I will aim to provide slightly more detail in this post.
Using credit cards to get out of debt has been one of the key parts to my debt-free journey. And this isn’t even due to the fact that utilising credit cards gives you better credit rating! There are two types of credit card that I’ve used to help me, each with their own unique benefits. I’ll describe both below. Essentially the main point to remember is that unless your credit card offers you one of the two benefits below, you shouldn’t really bother with credit cards.
Before we dive in, let me just make one point very clear. You shouldn’t use credit cards if you can’t control your spending!
Points based credit card
The basic principle of a points based credit card is that you earn some sort of loyalty points from using your card for day to day spending. This is really important – day to day spending! This is not to use for credit and think you have additional money to spend. Use this for your usual expenses and shopping, and pay it off in full at the end of the month so you avoid interest payments and fees. This way, you max out the benefits but don’t get into debt! Score!
My trick with this is to find a card which gives you a large bonus for spending a specified amount of money in the first few months – especially if you have a big purchase coming up anyway! As an example, when I used to commute from London zone 6 to zone 1, I would buy an annual travel ticket. This was about £2,500 so I would make sure I got a new card just before that to max this out.
My personal favourite has been the American Express card. [Note: referral link, where we both get a bonus if you sign up!]. If you haven’t had an Amex in the last few years, your first year of membership is usually free. I personally use the Nectar Amex, because I live next to a Sainsbury’s and therefore do the majority of my food shopping there. The Nectar Amex allows me to gain nectar points through my purchases, which I then use to get money off my shopping! I also have a video explaining this here: How I got £145 of free shopping at Sainsbury’s. The Nectar Amex costs only £25 a year after your first free year, and considering I have already got a significant amount of money off my shopping from it, I will definitely be keeping it after my free year is up!
I have also previously had the Gold Card Amex, and this actually got me about £150 off my Emirates flight after a year of using it. The Gold Card, however, does have much higher yearly fees after your first year (but you can cancel after a year, which is what I did!).
0% balance transfer credit card
The second type of card you should utilise to get out of debt is the 0% balance transfer card. I have used 3 different types of 0% balance transfer cards to help me get out of debt.
Essentially, this is a card where you can transfer the balance of your existing credit card, and not incur any interest on it for a specified amount of time (usually 12-24 months). The majority of cards have a transfer fee, which usually ranges between 1-3.5% from my experience. However, the last two transfers I made were with 0% transfer fee as well! I genuinely didn’t know these existed until my boss told me about it… d’oh! It takes some research to find these, and if your credit rating is really bad you may struggle – but if your interest is higher than the transfer fee then it’s still worth doing.
On top of the 0% transfer fee, my other trick is to budget so that you can pay the minimum payments on this card (make sure you have enough to pay the balance off at the end of the period if need be), and use the “spare” cash to pay off any interest bearing loans or cards! I put this all towards my 8% interest loan, and saved a lot in interest. Now my only remaining debt is 0% cards.
Anyway, I do hope that this has been somewhat helpful, and as always please do shout if you have any questions 🙂