Use Credit Cards Sparingly to Avoid a Debt Hangover

By: MoneyFacts

Credit cards have long been established as a popular payment method and are currently celebrating their 50th birthday in the UK. However, increasingly tempting credit card limits (Barclaycard estimates that the average limit is now a staggering £4,000) mean that borrowers could find themselves falling into a spiral of long-term debt.

However, credit cards can be helpful if used sparingly, and if borrowers ensure that they grab a good deal and pay more than the minimum repayment each month.

There is now considerable variety in the credit card market, which means that borrowers have more opportunity to find the perfect card for their borrowing needs. Interest-free credit cards are great for those who are looking to spread the cost of a larger purchase or debt, while low rate purchase cards are a straightforward choice for those who are planning more regular spending. Hunting down a best buy deal will also ensure that the card works in the borrower’s favour - see the table below, compiled by Moneyfacts.co.uk, for more details.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“Credit cards are a shining example of how consumers embrace payment methods that save them time and money. However, this useful bit of plastic doesn’t always come cheap. Most credit cards on the market currently charge 18.9% APR, which is well over double the rate on the best low rate credit card. In addition, the average purchase APR has steadily risen over the years to its present all-time high of 22.3% APR.

“Borrowing £4,000 on a card charging 18.9% APR will cost £1,097 in interest and the debt would linger for two years and 10 months if a repayment of £150 is made each month. However, if a borrower opted for a credit card charging 6.4% APR, the lowest rate currently on the market, and made the same repayment, then they would save £780 in interest. And if they used the best interest-free credit card and paid back the debt before the offer ended, then they could avoid accruing interest charges altogether*.

“The real danger with credit cards is that consumers can become too comfortable with debt. Larger credit limits mean that it’s too easy to innocently increase the amount of money owed, and this can lead to a never-ending vicious cycle of debt.

“Certain measures, such as stopping automatic credit limit rises and alerting customers when deals end, could help borrowers manage their debt. Another helpful feature would be for card providers to encourage borrowers to pay more than the minimum repayment each month.”

*Credit card cost based on a £4,000 debt with a fixed monthly repayment of £150. Once the remaining debt reaches £150 or less, a minimum payment of 1% of the debt plus monthly interest or £5 per month is made, whichever payment is higher. Based on 18.9% APR it would take two years and 10 months to clear the balance with £5,097 repaid in total. Based on 6.4% APR it would take two years and five months to clear the balance with £4,317 repaid in total. The best introductory 0% interest purchase credit card is shown in the table.

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