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Lots of people have credit card debt but do you know how to deal with it if it starts to get out of control? Here's what you need to know.
Did you know that official figures from the Bank of England show that outstanding borrowing on plastic increased by £1.8 billion in March this year? If you have a credit card, then you’re definitely not on your own.
Attitudes to borrowing on credit cards can vary a lot from person to person – for some it’s completely normal and for others it’s cause for concern. So what is the best way to handle your credit card debts? Here’s how to make borrowing on plastic work for you.
When you use a credit card you’re borrowing money from the lender and promising to pay it back at a later date. You’ll get a statement every month which outlines your outstanding balance and how much you’ve paid off.
You don’t have to pay the whole amount off that you owe every month – but there will be a minimum amount that you have to pay, otherwise you will be violating the agreement you made when you first took the credit out. This can result in additional charges and damage to your credit history.
If you pay back everything you owe at the end of every month, you won’t have to pay any interest. But if there’s anything outstanding, then you will be charged interest (unless you’ve got a deal where it’s interest free for a certain amount of time). You should always aim to make at least your minimum monthly payments and if you can pay more, than even better.
How much interest will I pay?
Just like with a loan, how much interest you pay depends on the lender and the APR they have set. However, some credit cards offer 0% interest – at least for a limited period. There are some cards that offer an interest free period of up to 32 months. This means that if you manage your borrowing carefully, credit cards can work out the cheapest way to borrow money – but these cards are usually available only to those with an excellent credit history. If you decide to go for one of these cards, always make sure you know when the interest free period ends and try to pay off the whole balance by this date, so you don’t unwittingly end up paying a high rate that you weren’t expecting.
Remember too that if you have an interest free card and you miss a payment or pay less than the minimum, then you may lose the interest rate offer and revert to the card’s standard interest rate.
That doesn’t mean to say that you should have a credit card. Before you decide to get one, you should have a good reason for the borrowing and a sure plan to pay it back. You should understand how much it’s going to cost you in interest if you don’t pay the whole balance back each month. In general, you shouldn’t borrow more than you need and, if possible, use savings instead.
If you’re aiming to pay off all the debt on your cards, make sure you pay the most expensive card first – for some people this might mean paying off store-cards first, and then focussing on credit cards.
So what should you do if you have a 0% card and it’s getting close to the end date but you don’t have enough money to pay off everything you owe? Doing a balance transfer might be your best bet. This means moving your debt from your current lender to a new lender – one that won’t charge you interest, or offers a lower interest rate than your current card will revert to.
Bear in mind that your new provider may charge a fee for a balance transfer, so be sure to find out what this is and work out whether it will be worth it for you. The new provider may not offer you a credit limit that’s high enough to cover the whole balance that you want to transfer, so you may end up with some left on the old card attracting interest.
In general you shouldn’t make any purchases with a card that you’ve transferred to, as this will normally have the cards standard APR attached to it. There are some deals however, where the introductory low rate includes purchases, but always check this first. How much credit you have already and your current credit rating will usually effect whether you are able to get an additional card.
Dealing with unmanageable credit card debt
It’s important to remember that credit card debt is not a priority debt. If you’re getting letters from creditors asking you to pay, it can seem like a very urgent issue, but there are still some payments you should put before your credit cards.
Your rent or mortgage for example, as missing these payments can lead to losing the roof over your head. Secured loans are also classed as priority for the same reason, as is Council Tax, utility bills and child maintenance or court fines. You will need to deal with your credit card debts, but in the short term if it comes down to a choice between your credit card and a secured repayment for example, you should choose the secured debt.
If you feel like you’re drowning in credit card debt, help is available. You should chat things over with a trained debt advisor and see what they recommend. Just use the options at the bottom of the page and you can get the help you need today.
by Christine WalshBack to blog home