Credit cards are increasingly popular and, although they can have their uses, it is far too easy to end up with credit card debt that spirals out of control. According to the money education charity Credit Action, in April 2013 the total UK credit card debt was £55.3 billion.
Credit cards can be dangerous because their interest rates are so high; Credit Action also found that in April 2013 the average interest rate on credit card debt was 17.46% – that’s 16.96% above the Bank of England base rate. All this means that credit cards should be treated with caution. By following a few basic rules, you can manage your credit cards effectively, and avoid falling into a debt spiral. If you are concerned about your credit card debt, do not hesitate to contact a debt charity for free advice.
Choosing the right card for you
There are different types of credit card, and not all of them will be suitable for your needs. Before you choose a card, you should think about what you will be using it for, and how much you can afford to borrow. Here is a brief guide to the different types of credit card and who they are suitable for:
0% balance transfer cards: these can be useful for people with existing debts. They allow you to transfer existing debts to the card, which you can then pay off at 0% interest. However, you must make sure that you will be able to clear the debt before the 0% period is over, otherwise your interest will shoot up. You should also be aware that, although balance transfers are interest-free, purchases will probably be charged at a high rate of interest, so avoid the temptation to use this card for a shopping spree. Remember to pay at least the minimum repayment amount each month, or you could incur charges.
Cashback and reward credit cards: these cards offer rewards for using them, such as cash or air miles. You can earn substantial rewards with these cards, but only if you are able to pay the balance in full every month. These are unsuitable for people who won’t be able to afford the full balance, for example if you’re using the card for expensive one-off purchases or don’t have a secure income.
Low-rate life of balance cards: these can be useful for people who want to transfer a balance to a credit card, but won’t be able to clear it before an introductory 0% period is over. These cards guarantee that the interest rate won’t increase, as long as you meet the minimum payment each month. Again, bear in mind that the interest rate on purchases may be higher.
0% purchase cards: these cards charge no interest on new purchases for an introductory period – usually 12 months. This type of card can be useful if you want to spread the cost of expensive purchases over a year, or free up money to pay off more expensive debts. However, you must make sure to either pay off or transfer the balance on the card before the introductory period runs out, otherwise your APR will increase dramatically. These cards are only suitable if you know that you will be able to do this, and are disciplined enough to set aside money to pay off the balance.
Credit builder cards: if you have a poor credit rating – or none at all – there are credit cards you can take out to help you build up a good rating. These cards often have a very low borrowing limit at first, which grows over time as you prove that you can manage it. The idea is that by spending a small amount on your card and paying it off in full each month, you can build up your credit rating. However, these cards should not be used for borrowing and you MUST pay off the balance in full each month
When you have decided what type of card you need, remember to shop around to find the best rates.
Read the small print
Your card’s terms of service will contain vital information, which you must make sure you are aware of before you start using your card.
How are your payments managed? Something to look out for in the terms of service is the phrase ‘negative hierarchy’. This is a way of calculating interest that means that any payments you make will be assigned to the debt with the lowest interest rate, allowing the more expensive payments to build up more interest. Avoid this problem by paying off the full balance every month.
Differing interest charges: your card issuer will charge different levels of interest for different ways of using the card. Make sure that you are aware of what the different charges are before you start using it. As a general rule, using your card to withdraw cash at an ATM usually incurs high interest, as does using credit card cheques to “borrow” money from your card account. Try to avoid using your card this way. Remember that if your card offers 0% on balance transfers, purchases are likely to charge high interest and vice versa.
Keep on top of your payments and don’t get carried away
It is vital that you pay your bills on time; a delay of just one day can incur a heavy penalty. You may wish to set up a Direct Debit to make the payments automatically, but you must make sure that the money is in your account before the payment is taken.
If possible, it is a good idea to pay off the full balance each month, rather than just the minimum payment. Remember that charging you interest is how the card issuer makes money; they offer you a minimum payment amount because they want you to take it. If you only pay the minimum amount, the rest of the balance is carried over to next month and interest is added on top. If you can only afford to repay the minimum amount, then you are spending more than you can afford to pay back and you need to cut down.
Remember to check over your statements carefully each month, and if you notice any unusual activity or payments you didn’t make, you should contact your card issuer immediately. If you simply throw your statements away each month, it could be months before you find out that you’ve been a victim of fraud.
If you are worried about your credit card debt or are struggling to make repayments, stop using your card immediately and consider speaking to a debt charity, who can offer free advice to help you.
Ruth Davies writes for YourWealth.co.uk, a personal finance website that aims to provide consumers with the tools to take control of their finances, from budgeting and free debt help to planning for the future.