We’ve all seen the fantastic offers. 36 months interest free plus no payments for a period of time. But what is the real cost of credit, and what happens if you don’t pay off the debt before the interest free period runs out?. We tell ourselves that we’ll ‘definitely pay off the balance before the interest free period expires’.

But when it comes down to making a payment, suddenly the credit card issuer’s suggested monthly repayment of three per cent seems particularly attractive, especially when you’ve got lots of extra costs that particular month (and every month thereafter).

Stop. Often your credit card issuer wants you to pay the minimum payment amount, because that means you’re likely to end up paying them interest on a balance outstanding after the interest-free period. Let’s take a look at what this means, using our example of a 36-month interest-free offer with an interest rate of 24.95%, using a typical minimum repayment amount: Interest free period: 36 months Credit amount: $3,000 Repayment: 3% of outstanding balance each month Amount still owing at end of interest-free period: $1,018. If you continue making the minimum payments once the interest-free period is over and 24.95% p.a. interest is slapped on, you’ll only ever be paying off interest and will never actually pay off your credit card debt.

The solution is simple The very first thing to do once you’ve made your purchase is to take the balance of the credit you’ve taken (in our example $3,000) and very simply divide it by the number of interest free months (36). You now have the monthly sum you need to pay from the first month to the last month of the interest-free period (in this case, $84.67). It’s that simple. Ignore the minimum payment that the credit card issuer suggests, and set up this repayment amount as a direct debit from the very first month. But don’t forget to keep an eye on fees like account opening, late payment, annual and transaction fees etc. Depending on your credit issuer, these can add up and significantly add to your balance owning.

And there’s more Let’s not forget that the issuer is likely to give you a credit limit much higher than that of the item you’re purchasing. One of the most effective ways to avoid racking up further debt is to lower your credit limit as soon as you activate your card. Wait any longer and only the most disciplined of us will avoid making an extra purchase when something we didn’t realise we had to have is suddenly 60% off.

Make paying off your card a priority Of course, no one’s arguing against the value of interest-free credit if you manage to pay back your credit card within time period. And we all start off with the best intentions. But if you want to avoid handing over your hard earned cash in interest payments year after year, then make paying back your credit a priority.

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