In the right hands, a credit card can be extremely useful. Offering access to goods, extended borrowing terms, variable rates of interest and strong legal guarantees, there are plenty of reasons why people should use credit cards. The problem is, if you do not clear the balance as soon as possible and let interest accumulate, debt can build up – fast!
In February 2012, PricewaterhouseCoopers (PwC) published data on Britons’ personal indebtedness. The research revealed that the average family in the UK owed around £7,900 on overdrafts, unsecured loans and credit cards. Worryingly, the study found that 25% of young people aged between 25 and 34 paid for essentials such as food and fuel using credit in 2011.
As published in the Telegraph, PwC director, Simon Westcott, commented: “UK consumers are among the most indebted in the world, with the average UK household still saddled with nearly £8,000 of unsecured debt.”
The director continued: “Our credit confidence survey has shown that there is a growing reluctance to borrow in the future and a marked deterioration in confidence about meeting repayments, particularly among 18 to 24-year-olds.”
One positive finding of the PwC report is that reliance on credit cards has fallen in the UK. Between 2011 and 2012, credit card usage fell by around 5%. The average credit card balance is now approximately £1,000.
Mr Wescott explained: “Consumers discarded nearly one million cards in 2011, taking the number of credit cards in circulation down to levels not seen for almost a decade.”
Credit card usage may be in decline, but high-interest debts are continuing to cause problems for many borrowers in the UK – and taking out credit to pay off credit is often seen as the only solution. The trouble with this is that people who rely on credit tend to be among the most financially vulnerable in society. Borrowers on limited incomes who run up debts on credit cards, can quickly discover how difficult it can be to meet repayment terms. Charges, penalties and monthly interest keep adding to the balance, locking many people into long-term debt.
The smart way to use a credit card
1) Pay off the balance as soon as you can
This may sound like an obvious tip, but many people can see credit cards as ‘free money’ and a bill that you don’t really need to worry about. Because you haven’t used cold hard cash to pay for a purchase, it can be difficult to have an emotional connection to what you’ve spent.
Credit cards are there for short term use – so don’t let interest build up on your purchases. Whether you’ve used the plastic to pay for a holiday or an emergency boiler repair, make sure you have the funds available to repay that bill as soon as possible. If it’s not readily available, set a budget in place so that you can afford to repay it.
Clearing debts in a shorter amount of time will also reduce the total amount you’ll have to repay as you won’t be adding additional charges to the bill every month.
2) Balance transfers
If you qualify for a 0% APR rate credit card that you can transfer the balance of your current card to, then this could be a great way for you to repay what you owe and clear your credit card debt. Make sure you know how long the 0% APR rate lasts for and take advantage of this offer – ensuring you repay as much of the balance as possible. Just make sure you don’t continue to add purchases to your card!
If you can’t transfer the balance of a credit card to a lower rate card and are only making minimum repayments on your debts, then you could consolidate your debts into a Debt Management Plan or an IVA.
Both of these solutions are suitable for helping you clear unsecured debts, so if you have store cards, payday loans, catalogue accounts or overdrafts that you also want to clear alongside your credit card, you can.