How credit cards work?
A debit card is connected to your bank account and will only allow you to spend money if your bank agrees for the transaction to go through (if there's enough in your account, including any overdraft).
A store card does involve borrowing money (often at high interest rates), but limits you to using the card to buy things sold by one shop or chain.
A credit card lets you borrow money instantly to shop anywhere - in any shop that accepts credit cards, through online retailers and even to withdraw cash from ATMs. They can be very useful for buying expensive items whose cost you need to spread over several months. But the fact that a credit card is so easy to use can make it dangerous.
What is credit card debt?
When you buy something with a credit card or you use it to withdraw cash, you are borrowing money from the credit card company. If you don't pay back it all back by the due date, the credit card company will charge interest on the amount that is outstanding (unless it's an interest-free card).
The amount of interest charged depends on how you've used the card: withdrawing cash can attract a much higher interest charge than buying goods and services.
Problems can easily start when you repeatedly spend more on your card than you can repay each month, so your credit card balance starts growing.
Credit card companies require card holders to pay off a minimum amount each month, often 3% of the total borrowed. If you don't pay more than the minimum, however, it could take a lot longer to pay off the debt - and cost a lot more in interest - than you expected.
Different kinds of credit cards
You may have applied for your credit card because it offers a particular deal - cashback, money off supermarket shopping or flights, or zero interest for a number of months (or even years, in some cases).
But the benefit of cashback and discount deals can be wiped out by interest charges if you don't pay off your account in full each month.
Making a monthly payment late, missing it altogether or exceeding your credit limit could make an interest-free agreement null and void, which would mean the credit card company starts charging the standard interest rate on your account.
What if I don't repay?
In addition to losing any promotional rate on your card, you could also be charged a penalty of up to £12 for paying late or missing your payment altogether.
Plus, you risk damaging your credit rating. You could end up receiving a County Court Judgment (CCJ), which will be entered on the Registry of County Court Judgments.
Credit card debt & credit ratings
Information about missed or late payments and CCJs is collected by credit rating agencies. They use it to compile your credit record - the measure that lenders use to help them decide whether to lend you money.
If your credit record shows missed payments or a CCJ, lenders might not grant you any credit - or might charge you more if they do.
When you apply for credit, lenders will also take a look at how much you owe. Even if you're making all your payments on time, you'll probably find it hard to borrow any more money if it looks like you're carrying too much debt.
How do I get out of credit card debt?
It's easier not to get into debt than to get out of it! So try to use your credit card only for 'big-ticket' items, not for everyday spending. Even more important, don't borrow any more on it than you can comfortably afford to repay - preferably, before it attracts any interest at all!
When you apply for a new credit card, set up a Direct Debit to ensure your payment is made on time each month. You can alter the amount if you have less money to spare from time to time. But remember - the less you repay, the more likely it is that your debts will get out of control.
R3 tells us that one in ten credit card holders are only managing to pay the interest charged on their account each month, but were unable to pay back any of the actual money they had borrowed.
If you're finding it difficult to reduce the amount you owe, you could consider moving the balances on existing cards to a new credit card which charges 0% on balance transfers for a set period.
You will have to pay a balance transfer fee (often around 3% of the amount you transfer), but everything you pay during the 0% interest period will go towards reducing your balance, rather than meeting interest charges.
For this to work, you'll have to stop using your old credit cards - you might want to close the accounts and cut up the cards so you can't be tempted to use them. Otherwise, you could end up running up fresh debts on your old cards, so you end up worse off than you were before you transferred your debts.
Problems with credit card debts?
If you think you will be unable to make a credit card payment, you should talk to your lender about your situation as soon as possible. They may help you come up with a repayment plan that you can afford.
Beware organisations that claim to be able to write off your credit card debt by using a legal loophole. The Office of Fair Trading has warned that these claims are misleading and could end up costing you even more money.
Sorting out debt problems by yourself can be tricky. It might help to get some expert credit card debt advice.
I'm struggling with credit card debt
If you're struggling, the most important thing is to do something about it sooner, rather than later. Bury your head in the sand and you're giving your problems an opportunity to get even worse!
Depending on the kind of situation you're in, there are ways we might be able to help you.
Debt consolidation loans
A new loan that replaces multiple debts, paying them off in one go. Aside from simplifying your finances, this could reduce the amount your debts are costing you every month.
However, this kind of loan is often secured against property, so you could be putting your home at risk of repossession if you don't make the payments. Repaying debt more slowly can also cost you more in the long run, due to interest.
If you're seriously in debt and you've already missed payments, you might not find a lender who'll give you a loan, or you might have to pay a higher interest rate if you do. But there are other ways we could help you with your debts.
Debt management plans & DAS
Sometimes, your lenders might agree to accept lower payments every month if they can see you can't afford your original payments - but could repay everything you owe if they let you do it more slowly.
However, making smaller payments can affect your credit rating, as well as taking longer and costing more in the long run. Fees are also payable for ongoing services.
If you can't repay everything you owe, entering some kind of insolvency might be the best way for you to tackle your debts.
Each one of these is a kind of insolvency, so they involve admitting you simply can't repay the money you owe in full. Each one's different, but each one can protect you against action by your lenders - and can write off some or all of your debt.
However, entering insolvency is a big step. It'll have a serious effect on your credit rating. If you're declared bankrupt, you could lose your house (if you own it). If you enter a Trust Deed or IVA, you might have to release equity from any property you own. And you won't even be able to enter a DRO unless you meet some very strict criteria (for example, you can't own anything expensive - like a house).
Just call us on 0161 605 4810 if you want to know more about any of these debt solutions.
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