Credit cards are something that more than half of the British population makes use of and while they can be a great tool, they can also land you in debt if you’re not careful.
A lot of people tend to purchase items using their credit cards without planning about how they’re going to pay back the balance.
This can lead to a lot of problems such as debt with high interest charges which could be very hard to repay.
Today, I’ll be going over how credit cards work, how you can avoid credit card debt and what you can do if you do have credit card debt.
How Do Credit Cards Work?
A Credit card is a plastic card which you can use to purchase items or services. You can also use a credit card to withdraw money from a cash machine.
Credit cards can be issued by banks, finance companies, clubs and some stores.
You’re only allowed to spend up to a certain amount on your credit card every month. This monthly limit is known as your Credit Limit. How high or low your credit limit is depends entirely on your financial circumstances.
Every time you purchase goods or services using your credit card, that amount is added to your account. This amount is what you owe and it’s known as your Balance.
Credit cards have an interest-free period for you to pay off your balance. As the name suggests, this is the period where no interest is charged towards the amount that you owe. Usually, this period is anywhere between 20 to 55 days long.
After this period, your credit card company will start charging interest on the amount of money you owe. It’s a very good idea to pay off what you owe before the interest-free period ends because credit cards usually have very high interest rates.
You can opt to look for credit cards that have special offers according to which you are not charged interest even if you don’t pay off your balance entirely.
Your credit agreement will give you all the details about how long your interest-free period will be as well as how much interest will be charged once that period ends.
Your credit card company will send you a statement every month which will have complete details about your payments as well as the amount you owe.
Here are the details that your statement will contain:
- Details about each purchase you’ve made using your card since your last statement.
- Details about how much interest you’re being charged currently as well as any additional charges on your account.
- The amount of money you owe, i.e., your balance.
- The minimum payment you can make towards your balance.
- The date by which you must make your payment.
- How and where you can make your payment.
- Your provider’s contact details.
Your statement can be a great tool for figuring out your repayment plan as well as for recalling how much you owe in case you forget.
Be sure to check your statement thoroughly every time you get it and make sure all the information is correct. If you spot a purchase that you feel is incorrect, contact your provider immediately to get it removed.
How Do I Stay Out of Credit Card Debt?
The Cash-on-Hand Rule
The first step to staying out of credit card debt is to realise that it’s definitely possible to use your credit card regularly and stay out of debt.
The trick to this is to only use your credit card for purchases based on the cash you have in hand. This means you should try to only use your credit card as a convenient payment tool, not as a debt instrument.
If you only make purchases that you’re sure you’ll be able to pay for immediately when your credit card bill comes, then by all means, go for it. However, if you feel you’re going to be having trouble paying it back, you may want to reconsider it.
My advice would be to have a self-imposed spending limit on yourself in addition to your credit limit.
Short-Term Loans can be Beneficial at Times
Some readers may disagree with what I’ve said above and might be of the opinion that using credit cards in this way would be minimising their potential.
I agree with this sentiment to an extent; Sometimes, using your credit card to make a purchase that you can’t pay for immediately can be a smart move. However, it’s important that you’re able to pay off your balance as quickly as possible. The reason for this is the high interest rate on credit cards.
Thus, if you can’t pay for something all at once but are sure you’ll be able to pay for it in short-term instalments (4 – 5 months), you should use a credit card for it. You can seek advice from a professional if you’re unsure if you’ll be able to make the payments in a short amount of time.
However, if you feel you’ll be making minimum payments towards your balance for months on end, I suggest you don’t make such a purchase using your credit card. This can lead to persistent debt and you may reach a stage where you’ve paid more in interest than you have towards the actual original debt.
Be Wary of Your Credit Limit
When you first start out with your credit card, your credit limit will most likely be very low. This will automatically stop you from spending too much money.
However, over time, your credit limit will begin to increase. Thus, it can definitely be very tempting to spend a lot more money once the credit limit has increased.
You must keep in mind that even though your credit limit has increased, more likely than not, your financial budget has not. Thus, you must keep yourself in check and ensure you’re not making extravagant purchases that could drown you in debt.
What will Happen if I’m Unable to Pay My Credit Card Bills?
According to your credit agreement, you have to make at least the minimum payment towards your balance. If you don’t make this payment, then:
- Your creditor will contact you inquiring about why you have not made the minimum payment and will request you to make the payment as soon as you can.
- After this, if you wait too long or just simply refuse to make the payment, your account will default
- If you still do not pay back the money you owe, further action could be taken against you such as debt collectors being hired to collect money from you.
- Your creditors could also take out a County Court Judgment (CCJ) against you which could cause bailiffs to come to your home and seize your goods in order to pay back the money you owe.
Is it Possible to Negotiate Credit Card Debt?
If you’re falling behind on your payments and have a valid reason for it, you can definitely contact your provider and explain to them why you’ve been falling behind.
Explain to them why you have been missing payments and they may offer you a reduction in the amount you owe or a payment holiday so that you have time to get your financial affairs in order.
You can contact an independent charity for free debt advice such as StepChange or National Debtline. They can analyse your financial situation and give you advice about what the best course of negotiation with your provider could be.
You can also contact an independent charity for advice on a debt management plan. They can help you plan it which you can then propose to your provider.
A debt management plan is an agreed-upon payment schedule between you and your creditors which states the amount of payments you’ll be making to them each month.
You can work out this plan by analysing your income and expenditures and seeing how much money you can set aside to pay towards your credit card debt.
If you have multiple credit cards, you can make minimum payments towards all of them if they are sufficient enough to pay off the debts completely and keep you out of persistent debt.
If this is not the case, then you should make minimum payments to all of your cards except for the card that has the highest amount of money you owe. For this particular card, you should make payments larger than the minimum payment.
Be sure to pay priority debts first before you start paying non-priority debts like credit card debt. Priority debts are payments that can have serious consequences if you don’t pay them. This can include council tax arrears, rent arrears, etc.
Also, be sure to take care of your basic living costs and expenditures first before you start making payments towards credit card debt. Never feel pressured to pay more than you can afford.
Most credit card providers and companies registered in England are authorised and regulated by the Financial Conduct Authority. Thus, they have to stick to a close set of rules when pursuing you for your debt.
Always know that even if you cannot afford to pay your debt, there are many options out there for you to explore. Do your research and reach out to a professional that can help you. It’s a very good idea to reach out to a professional debt charity for advice if you are in debt that you cannot afford to pay.
Not only will they give you advice on which debt solution would be best for you but they will also build upon this advice by telling you how to apply for that solution and set it up.
I always tell my readers to seek advice from an independent charity rather than a private debt management company. This is because the latter will charge you for their advice whereas the former will give it to you free of charge.
If you have a lump sum of money that is quite large but not as large as the amount you owe, you could opt for a ‘full and final settlement’ offer.
A full and final settlement is usually less than the amount you owe but your creditors will be willing to accept it if it’s a one-time lump sum payment. Be sure to seek advice from a professional if you’re considering this option.
Is it Possible to have Joint Credit Card Debt?
According to the law in the UK, a credit card can only be in one person’s name. Due to this, it’s impossible to have “joint credit card debt”.
That being said, you can definitely ask your provider for a second card for your spouse or child to use.
Keep in mind, however, you will still be responsible for the money spent on these cards. The second card holder is not liable for the money spent on the card. Only the primary cardholder, i.e. you, is responsible for the balance owed on a credit card.
How does Credit Card Balance Transfer Work?
Some credit cards allow you to transfer the balance to another card. This can actually be a great way to reduce your debt.
You can do this by transferring the balance from your current card to a card that charges a lot less interest than your previous card did. This can help you pay off your debt a lot faster.
While this is definitely a great way to reduce your debt, it can prove to be quite difficult. This is because getting a credit card with low or 0% interest can be very hard if you have a poor credit score, which you most likely will since you’re trying to pay off debts.
You should also keep an eye out for transfer fees when transferring your balance. In most cases, this fee is 2 – 3% of the total amount you’re transferring.
Once you completely transfer the balance over to a new card, I advise that you cut up your old card and throw it away as well as close your old account.
This is because if your old account is still active, you may be tempted to spend money on it and then you’ll end up with two debts instead of one.
Many people believe credit cards are an essential and wonderful tool for living in the modern age whereas others feel that they are a debt trap.
I’m somewhere in the middle: I feel they can be both. It all depends on how you use them.
Thus, it’s important to educate yourself about how to avoid debt effectively and ensure that you’re using your credit card responsibly.
If you keep yourself and your spending habits in check, you’ll definitely be able to avoid the hole of debt that many Brits find themselves in every year.