Ultimate Guide to Credit Card Debt

Credit cards offer convenience when buying items online or in store, they allow you to pay back the money through instalments at a later date. This can be useful, if used correctly, but if you’re not careful, it becomes an expensive way to borrow money, and may take you longer to repay what you have borrowed.

Our guide to credit card debt gives you advice and guidance on how to clear credit card arrears. We will also cover how you can manage credit card debt effectively.

What happens if I have credit card debt?

If you fail to pay the minimum payment each month, your account will enter into arrears. The creditor (the credit card company) will contact you to request that you make any payments you have missed. If you’re unable to do this, later on the account will go into default and the creditor will likely take further action against you.

For further information about how credit card debt is recovered, check out our ultimate guide to debt collection agencies.

What about joint credit card debt?

UK law only permits a credit card account to be in one person’s name, joint credit cards are not an option. However, credit card providers may allow you to have a second credit card which can be used by your partner or someone else you know and trust.

Whether a second credit card is used or not, you are still liable for any amount spent on both credit cards, as any application and credit agreement will be held in your name. The second credit card holder will not be liable for any amount owed on that card, this includes any money they spend with the card that has their name on it. Due to the above, we strongly advise you to think carefully as to whether a second credit card is necessary.

What if I only make the minimum monthly payment?

Every credit card has a minimum amount you are required to pay back each month. In most cases, this will be calculated as a percentage of the amount owed, typically ranging between 1% to 3%. There will normally be a minimum payment amount of £5 per month.

If your credit card payments include more interest fees and charges than the actual balance owed for 18 months or more, this will be classed as a ‘persistent debt’. Consumers who have a persistent debt will receive communication from their credit card provider asking for an increase to their monthly repayment amount. There are some credit card providers who are making changes to their terms and conditions to increase this minimum payment, in order to help customers come out of persistent debt.

Budgeting correctly can help you pay off your credit card(s) quicker and make things easier to manage in terms of affordability.

Credit card limits

Credit card limits can vary, depending on your credit history. There are credit cards available with a limit of around £250 aimed at people who have bad credit, generally, these cards will have the highest interest rates. However, if you’re able to pay them off in time, they can provide a great way to increase your credit score. This is because they show lenders that you’re meeting your monthly repayments, meaning they will be more likely to trust you.

Some credit cards have much higher limits, depending on your credit history, you may be able to have a limit of thousands of pounds. Regardless of what your credit card limit is, depending on how you manage the situation, anyone who’s spending irresponsibly can get into debt, and this can become difficult to repay.

If you have a good credit rating and you’re regularly making payments on time, some providers may offer to increase your credit card limit. If this happens, think carefully before you agree to any changes, if you do not require the additional amount, it’s okay to say “no”. Many consumers prefer to have a higher credit limit, in case they need the money in an emergency situation. However, this access makes it easier to spend more and could lead to large amounts of debt that become unaffordable and/or difficult to repay.

How expensive are credit cards?

Credit card interest rates will vary between a few percent to more than 75%. The interest rate you’re likely to be charged will largely depend on what credit card you have, and who the provider is. Your credit rating is also a rating factor.

Some credit cards may offer an interest free period of up to 60 days on eligible purchases. This essentially means that if you were to purchase something and pay off the full amount during this period, you will not be charged any interest fees. Other providers charge interest as soon as the card becomes active. Most credit card providers will charge you for withdrawing money from a cash machine.

In addition to interest fees, late payment charges will also be applied if you fail to make your monthly repayments on time. Generally speaking, these should not be more than £12 for any payment you’ve missed.

Finding it difficult to manage credit card debt? Speak to a specialist advisor today by calling 0800 121 48 63 or complete the online form on this page to request a call-back. We’re able to discuss a number of different wider financial solutions, helping you make the right decision.

What is a credit card balance transfer?

Some credit card providers allow you to move the amount owed on one card to another card, this is simply known as a ‘credit card balance transfer’. If you were to transfer debt from a high interest credit card to a card that offers low or even 0% interest, this can potentially help you pay off any arrears much faster. However, if you don’t have a good credit rating, it could be difficult to obtain a credit card that offers low or even 0% interest. This ultimately means that you shouldn’t depend on balance transfers as a reliable way to become debt free.

Remember to look out for any fees when transferring your credit card balance. Some providers may charge you an additional 2% to 4% of the amount you wish to transfer as an initial fee. These added fees may mean that you’re actually saving less than expected when taking advantage of lower interest rates from the new creditor.

If you have decided that a balance transfer makes financial sense, it’s a good idea to close your previous account as well as destroying the credit card. This will help you ensure you’re not making purchases on both cards, which could potentially leave you with twice the amount of debt.

How does a credit card affect my credit rating?

Credit card providers share data with credit reference agencies about how your card is being used. This data helps other creditors make decisions on whether they should lend you money, including the amount, and at what interest rate. E.g. if you’re always making payments on time, another lender may see your credit score reflect this activity, and will be more likely to approve you for credit.

Similar to other types of consumer debt, credit files display the following information about credit card debts:

• Credit card balance owed
• Your payment history
• If the account is in default or not

There is also some additional information that credit card providers share on your credit file, which other debts don’t always display. This includes the following:

• Credit card limit
• How much you’re spending each month
• How much you withdraw from a cash machine each month

What options do I have when paying off my credit card debt?

The best way to reduce credit card debt is to pay off as much as you’re able to so as quick as possible. This is because larger credit card balances will have a higher amount of interest and fees applied to them.

Each credit card bill will state what the minimum payment the creditor will accept would be. We recommend you try and pay more than this amount, this is because the minimum payment will only reduce the account balance by a small amount after any interest and additional fees have been paid.

It’s also worth noting that by missing payments, you will likely be hit with additional charges, this will be on top of your credit card debt and the interest.

Credit card debt problems

If you’re finding it difficult to manage credit card debt and are unable to pay on time, we recommend that you stop using your credit card immediately. Inform your current provider that you’re struggling financially, by doing this, they may even be able to freeze interest fees and charges, as well as agreeing a suitable repayment plan with you.

Minimum payments will generally only cover the interest fees and charges on your credit card debt. This means that if you’re only making the minimum payment, it will take much longer to pay off your credit card balance.

Credit card debt advice

If you’re finding it difficult to meet the minimum monthly repayments on your credit card(s) as well as any other creditors that you may owe money to, call Refresh Debt Services today on 0800 121 48 63 or complete the online form on this page to request a call-back.

Our friendly advisors provide free impartial advice and guidance. We’re able to discuss a range of wider financial solutions with you, helping you make the right decision when taking the first steps to become debt free.