Although credit cards can be a useful financial tool when used correctly, interest rates of between 10% and 30% make it easy for debt to spiral quickly if spending is uncontrolled.
Understanding how credit card debt becomes a burden, and the possible solutions, will help to avoid a poor credit rating and minimise future risk.
Although convenient and easy to use, the delayed payment structure involving up to six weeks of free credit makes it feel like you haven’t spent any money. It’s when the bill arrives that reality hits, and in some cases only then do you realise that you can’t afford to pay.
Additionally, only making the minimum payment allows debts to significantly increase over time. A purchase that initially seemed manageable can easily become a problem when interest is added each month, potentially with late payment charges and fees for exceeding your credit limit.
Understanding the knock-on effect of credit card debt is important. When late payments start to appear on your credit file, it could affect your ability to get a mortgage, loan or any other form of borrowing. Also, a higher interest rate may be charged on any future borrowing, and you may be declined for a loan.
Once this happens it’s difficult to see a way out of the situation but there are solutions that, if rigidly enforced, allow escape from the downward spiral, avoiding formal insolvency procedures.
Balance transfer cards offering 0% interest for a limited time stop the addition of monthly interest that so debilitates debtors. Although you’ll pay a percentage fee based on the amount transferred, you can isolate the debt and deal with it routinely over a period of time. Make sure that you don’t miss a payment though, or create new spending on this card, as you’ll be faced with a high interest rate.
Your credit card company is obliged to inform you of any increase in the Annual Percentage Rate on your card. This notification may be in the form of a separate letter, or found among the small print on your statement.
You aren’t obliged to accept this increase, however, and have a period of 60 days in which to inform your provider. You won’t be able to use the card again if you refuse the increase, but any monies owing can be repaid at the original interest rate.
You’ll soon notice a reduction of debt if you start to make more than the minimum repayment. In conjunction with moving the balance to a 0% interest card, it’s one of the best and quickest ways to rid yourself of credit card debt.
The card company may reduce the monthly payments for a while if you contact them about your situation, or freeze all interest on the outstanding amount. It’s always better to let them know if you are struggling to meet repayments, as they might be able to provide a short-term solution to give you breathing space.
Not everyone will be able to take out a new card at 0% interest, and if your financial situation is getting out of control you may want to contact a professional debt advisor. They can let you know the best course of action for your particular circumstances, and offer guidance on various routes into formal insolvency, should that be an option.
Paying off cards with the highest interest rate first, rather than those with the highest balance, is called ‘debt avalanche’ and is a good way to reduce the amount of debt quickly while attracting less overall interest.
Cash withdrawals involve a higher rate of interest than purchases and because interest is applied from the date of withdrawal, it adds considerably to the balance owing.
Once the debt is cleared, it would be worthwhile cutting up the card and closing your account to avoid facing the same situation.
If you’ve lost your job, state benefits and tax credits can provide vital financial support to see you through this tough time and help you avoid taking on too much debt while you look for more work...
If you live in Scotland and have been forced to work from home during the Covid-19 pandemic, you may be entitled to claim tax relief on your increased costs.
Our Scottish based team can help advise you on your debt problems.