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27.03.2018

Growth in Credit Card Debt Level Reaches 12 Year High

The trade association, UK Finance, reported yesterday that credit card use continues to soar as other forms of borrowing decrease in popularity. The amount of outstanding credit card debt in the UK increased by 8.3% over the course of February – the highest it has been since before the financial crisis. Around 220 million credit card transactions were made throughout the month, as more and more of us switch to plastic for smaller transactions.

Use of Credit Cards on the Rise

UK Finance has suggested that this shift in borrowing can be attributed to a few factors. Using credit cards can earn consumers loyalty points, and the rolling out of contactless technology has rendered card payments increasingly convenient. However Eric Leenders, managing director for personal finance at UK Finance, has warned that making use of credit cards is a necessity for some households to make ends meet as “real wages continue to be squeezed by inflation”.

Credit card use is on the rise compared to other forms of borrowing such as overdrafts and personal loans, suggesting a growing preference for short-term borrowing. This could be due to the greater accessibility of credit cards, or a symptom of wages which are failing to keep up with the cost of living, leading to many resorting to credit to plug the gap.

The Dangers of Credit Card Debt

With interest rates hovering around 19% APR, credit cards are one of the most expensive ways to borrow money – especially if you can only afford minimum payments on the debt each month.

If you were to borrow £3,000 on a credit card with an APR of 19%, paying off the debt by making only the minimum required payment every month would take you a staggering 27 years, and cost £4,192 in interest – without even making further use of the card. Because of their high interest rates, credit card use can easily lead to a vicious cycle of debt.

In response, the Financial Conduct Authority (FCA) has created a new set of rules for credit card providers, due to come into effect this September. Under these regulations, providers will be required to help customers after they have been in ‘persistent debt’ – paying more in interest and fees than on their borrowing – for 18 months. This help will usually consist of providing customers with advice on how to clear their debts, but could also involve waiving fees and interest. After three years of ‘persistent debt’, creditors will be required to provide their struggling customers with an affordable repayment plan.

An estimated 3.3 million UK credit card users are currently trapped in ‘persistent debt’, paying an average of £2.50 in interest and charges for every £1 they borrowed. The new FCA measures are expected to save credit card users around £1.3 billion each year, but some debt charities believe that financially vulnerable customers could still be trapped in debt.

Tips for Clearing Credit Card Debt

With more of us using credit cards for everyday transactions than ever, it is important to know how to avoid the pitfalls which can lead to unmanageable debt. Below we outline some key tips for reducing your level of credit card debt.

  • Consider a Balance transfer

If you are struggling to pay off your credit card debt, transferring the balance to a card with a lower interest rate could save you a considerable amount of money. Some providers will offer a card with a 0% APR introductory rate, meaning that every penny you paid towards the card would go towards clearing the debt. These cards are usually only available if you have a good credit score, and the introductory interest rate could give way to one which is higher than your current card, so do think through this option carefully. If you do decide to transfer your balance, remember to check the transfer fee too. This is usually around 3% of your balance, so if you owed £1,000 on one credit card, you would pay £30 to transfer it to another.

  • Avoid making Minimum Payments

Making minimum payments is the slowest and most expensive way to clear a credit card balance. It can take decades, and cost you thousands of pounds in interest, so it is important to always pay as much as you reasonably can every month. Even a small increase can make a huge difference.

  • Don’t use your Credit Card for Cash Withdrawals

Using your credit card to withdraw cash incurs fees, and will only make using your card more expensive. On top of this, frequently withdrawing cash on a credit card can suggest to potential lenders that you are desperate for money, making them less likely to extend you credit.

  • Prioritise Debts

Always make sure that your essential bills are covered before paying off credit card debt. Falling into arrears with council tax, rent or mortgage payments, or utility bills will incur more severe consequences than falling behind on a credit card bill. Once these essential bills are covered, next prioritise the credit card with the highest interest rate. Clearing this balance first will ensure that you pay the lowest possible amount of interest

  • Seek Independent Advice

Finally, if you are struggling to keep up with your debt repayments, it could be time to seek independent advice. A qualified advisor will be able to tell you what options are available for dealing with your debts.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.