Know how to break free from credit card trap with these tips

By Gerv Tacadena

How you use your credit card could give lenders reason to reject your home-loan application.

If you are planning to apply for a home loan anytime soon, then you better check your outstanding credit card debts first — how you use your credit card could give lenders reason to reject your home-loan application.

There are many Australians who struggle to manage their credit card loans — in fact, a recent study by credit bureau Experian found that two in five Australians find it hard to meet their repayments on time.

Missed credit card repayments taint your credit rating, ruining your chances of getting the go-signal from your home-loan provider. It is essential, then, for would-be homebuyers to know the value of consistent and timely repayments.

The way you deal with your credit card debt could speak a lot about how you could potentially address your mortgage repayments in the future. Once you take on a home loan, monthly repayments would be way higher and you would face stricter penalties when you miss one.  Therefore, prospective homebuyers should learn how to manage their finances to keep everything in order and avoid severe consequences.

Do not fret if you find yourself drowning in your credit card debts — there is still hope. You can start anew by following these suggestions that will tell you the best ways to deal with your outstanding balance. The process may not be easy and will likely involve drastic changes in how you live your life. But as you pay off your credit card debt, it will help you develop the commitment and patience needed to take on a home loan.

Do you want to know more about credit scores and ratings? Your Mortgage got you covered — you can check two guides that explain how you can access your credit rating and how you can improve your credit score.

Avoiding the use your card to make new purchases

One of the most critical things you need to do to finish paying off your credit card debt is to avoid using it further — avoid making new purchases with your card until you pay off your debt completely.

There are instances when you might not be able to avoid using it, especially for online transactions. In such scenarios, you just have to ensure that you pay what you spent immediately. It is also advisable to use your debit card instead.

Making a budget

A foolproof strategy is key to winning every battle — as you try to overcome your debts, it is a must for you to have a clear and efficient budget plan.

When you plan your budget, you need to consider two important things: your income and your essential monthly expenses. Start with how much you earn every month from your salary, investments, and other sources of income. In terms of cash outflow, you have to focus on what needs to be paid on a regular basis first — lay out all the necessary monthly expenses such as water and telephone bills, electricity charges, rent, groceries and supplies, and transportation costs. Consider cutting unnecessary costs like gym memberships, lifestyle subscriptions, and some leisure spending.

From there, see how much you can squeeze in monthly to pay off your debt. You need to make sure that you allocate as much as you can to avoid paying huge interest. The higher the amount you allocate to service your debt, the quicker it will take you to settle it.

However, do not forget to leave a portion for emergency purposes. You would not want to be empty-handed in should unforeseen circumstances happen.

Dealing with multiple cards

For those who own more than one credit card, paying them all off might appear taxing — undoubtedly, it is going to be a struggle but there are ways to tackle them efficiently.

When choosing which ones to take on first, you need to keep in mind two things: interest rates and the amount of debt.

The rule of thumb is to pay your credit card with the highest interest rate first while at the same time making minimum payments on all your cards. Another strategy is to prioritise paying off a card with the smallest outstanding balance.

The idea here is to make sure that you get to gradually reduce your debt until you only have to pay for one card. It is also best to contact your credit provider to close your account the soonest you pay off your balance. One credit card should be enough, especially if you are to start paying for your home loan.

Applying for home loans is easy — the hardest part is to avoid mistakes that can derail your application. If you are unsure of what you are doing, Check out this guide to know more.

Setting up automated payments

To make sure that you do not miss payments, consider setting up automated payments. You can contact your bank to set this up for you. Having this will make sure that you pay your dues on time, automatically deducting the payment from your bank accounts. Setting up automated payments also helps you stay committed to your goal.

Consolidating your debt

Consolidating all your credit card balances into a single debt is an excellent option if you want to keep things simple. There are many ways you can consolidate your debt, but the most common way is to take out a personal loan from a bank or credit union and using the amount you get to pay off all your outstanding balances.

You can also open a balance transfer credit card and transfer all your debts there. Some providers even offer promotional offers, allowing you to pay for your debt interest-free for a certain period. But be sure to pay off the full balance transfer amount before the period ends to avoid paying higher interest rate charges.

Lowering your credit limit

When you decide to keep one of your credit cards for emergencies and online payments, be sure to lower its limit. This will help you control your credit card use.  Be careful, however, given that lowering your credit limit might harm your credit score.

Also read: Credit vs. Debit Cards: Which Is Better?

Reaching out to your credit card provider

Dealing with credit card debt might be overwhelming for some — if ever you feel like the debt trap is already affecting your well-being, try reaching out to your credit provider to work on a new arrangement. Perhaps you can renegotiate the terms of your loan. Lenders are generally willing to give a helping hand to ensure that you do not default on your loan.

One final tip: seek expert help

If all of these things are too much for you, do not hesitate to pick up the phone and reach out to financial experts. They will be able to help you assess your overall financial health and determine strategies on how to settle your debts. These experts can also assist you in finding the right home loan according to your capacity and needs.

If ever you need to reach out to a financial expert, feel free to go to this page. You only need to answer a few questions about your concern and an expert will contact you the soonest possible time.

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