Credit cards can be a valuable tool for managing your money – if they’re used sensibly. Unfortunately, they often bring with them the temptation to spend more than you can afford, and a credit card is one of the more expensive ways to borrow cash you don’t have.
In this guide we’ll take a look at credit card debt, including what it is, what credit card debt does to your credit score, and where to get debt advice when you’re struggling to pay your credit card provider.
What is credit card debt?
While it might not feel that way at the time, spending money on a credit card is the same as taking out a loan. Like any other loan, the balance on your credit card needs to be repaid, or you will risk falling into debt.
Credit card debt is the debt credit card borrowers rack up by continually failing to pay off their credit card balance.
You’ll accrue credit card debt if you miss your credit card payments each month, and the consequences can be extremely damaging to your finances.
Credit card balances come with an interest rate which is added every month across the year. If you don’t pay your balance, you may face additional fees and charges on top of your interest. As with any creditor, credit card providers have ways of trying to force you to repay what you owe, up to and including legal action.
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How can I pay off my credit card debt?
Carrying credit card debt can hurt your finances both in the short-term (fees and payment charges) and the long-run (a serious debt problem in future). That’s why it’s best to pay off your credit card debt as quickly as possible. Below are some tips for tackling it.
Contact your credit card company
The best thing to do if you’re struggling with credit card debt is to stop using the card straight away and contact your provider to let them know.
By informing them that you’re struggling, you may be able to arrange a payment plan before the situation gets out of hand.
Try upping your repayment plan
If you’re only making the minimum payment, your credit card company will write to you asking to pay more to try and get you out of what’s known as ‘persistent debt’.
By setting yourself a realistic budget that you can easily stick to, you’ll be able to pay off your credit card faster without breaking the bank.
However, make sure you’re not leaving yourself short of funds for other priority bills such as your council tax or utility bills – the point is to pay back what you can, not to fall into trouble elsewhere.
What to do if you can't pay your credit card debt
If you start to fall behind with your credit card payments, it’s important to remember that the longer you continue to only make the minimum payment on your credit card, or not make payments at all, the more interest is added to your balance.
And if your credit card balance is getting out of control, it’s best to rein in your spending and face up to the issue as soon as possible.
All credit cards are protected by the Consumer Credit Act, so there are rules in place that credit card companies have to stick to when they’re marketing credit and setting out their terms to customers.
Can I get sent to prison for credit card debt?
This is something we get asked a lot, and many people worry that this could happen, but the reality is, the possibility of being sent to prison for unpaid debt is rare.
You can only be sent to prison for debts like criminal fines or government debts, and even in these situations, it’s often the last resort.
If you’ve been threatened with prison time by your credit card company, you have every right to complain, as they don’t have the power to impose this.
Does a credit card affect my credit score?
Yes, how much you borrow, and how well you pay off your credit card every month, will reflect on your credit score.
Your credit card provider will share details of your account activity with credit reference agencies to allow them to update your credit score.
This then allows other lenders to determine your ‘creditworthiness’ and decide how big a risk it is to let you borrow money from them.
It will also be noted on your credit file, which will show how much you owe, how many payments you’ve made, if you’ve defaulted and details of your credit limit.
Is it possible to renegotiate credit card debt?
This will be dependent on your situation and how much debt you owe to the credit card company. If you’re struggling to keep on top of your payments, it’s important to contact the company, explain what’s going on and let them know how much you can afford to pay.
A lot of companies will be willing to come to an agreement with you to pay an affordable amount, even if it’s only for a short time until you can get back on your feet.
In some cases, you may be able to agree a final settlement to pay a portion of the debt that’s less than the total balance – if you have the funds to be able to do this and can make the payment quickly.
What happens when you have joint credit card debt?
It’s not possible to have a joint credit card, as the law dictates that credit cards can only be in one person’s name.
However, it is possible for the company to allow you a second card to be used by someone else, such as your partner.
It’s important to note that even if you do have a second card, it will still be you that’s responsible for paying back the balance spent on both cards.
The other cardholder holds no liability, even if the card has their name on it.
As such, we’d always advise thinking about naming a second cardholder on your account very carefully and avoid doing this if you can.
What are minimum card payments?
This is the least amount you can pay each month towards the balance you owe. Every credit card has a minimum payment that usually ranges between 1 and 3% of the amount outstanding. For the most part, there is at least a £5 minimum payment.
The minimum payment often barely covers the interest added to the debt and can make clearing it a long process.
If you can only afford to pay the minimum and barely make a dent in the balance of your credit card, you’ll be in what’s referred to as ‘persistent debt’.
If you’re identified as being in persistent debt, regulation changes mean you will be asked to increase your payments or have your minimum payment increased.
What are credit card limits?
All credit cards come with a limit, which essentially is the maximum amount of money you can spend on it.
How much your limit is will be dependent on your credit file and rating, as those on the lower end of the scale will find it difficult to get approved.
That’s not to say those with lower credit scores can’t get a credit card. It is possible, but they will often come with higher interest rates.
If you do have a low credit score, it’s especially important to do your research before applying and make your repayments promptly.
If you make your payments regularly and on time, your provider may offer to increase your limit over time.
, we advise to think very carefully about this as it’s a risky road to take and can often lead to the temptation to spend more.
Interest rates on credit cards
Interest rates will vary across providers, ranging between 10-70%, sometimes higher. How much the rate will be will depends on the type of credit card you’re applying/approved for, which is usually determined by your credit score.
Some providers may offer you an ‘interest-free period’ on purchases, meaning if you buy anything with the card within that time you won’t be charged any interest – as long as you clear it before the period ends.
If you find yourself in the situation where you’ve missed payments to your credit card, you’ll likely find that you’ve been charged on top of the interest by way of a late payment fee.
The amount differs from one provider to another but is never usually more than £12 per missed payment.
Balance transfers and balance transfer credit cards
In some cases, you can transfer your balance from one credit card to another. The idea is that, by transferring your balance from a card with a high interest rate to one with a lower interest rate, borrowers can pay off their credit card bills a little faster.
In normal circumstances, this process would be done through a balance transfer credit card (also known as a 0 balance transfer card) – a special credit card with a 0% interest rate that allows you to repay your credit in an affordable way.
However, you may find it difficult to find a card to transfer the balance to if your credit score is on the lower end of the scale. As such, we don’t advise you to rely on this option to deal with your debts.
It’s also important to watch out for upfront or one-off fees when transferring a balance. The majority of 0 balance transfer providers will charge you 2-3% of your balance when you make the switch, meaning you’ll be saving less than you initially think, even if the interest rate is lower.
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What if I need debt advice for my credit card debts?
Considering how popular credit cards are, and how many different companies are happy to offer them, it can be easy for people to fall into credit card debt. Unfortunately, it’s not always as easy to work your way back out of it.
That’s where we can help. Creditfix is the biggest debt solutions provider in the UK, and home to a team of industry experts who offer people debt help related to credit card debts every day.
For free debt advice and information on your finances, or to find a debt solution that will help you pay off your credit cards once and for all, speak to an adviser for free today on 0800 0431 431.