Credit card debt

What is credit card debt?

Credit card debt is the term given to money owed on a credit card. It occurs when you use your credit card to make purchases and fail to pay off the balance in full by the due date.

According to the latest Bank of England data, consumers owe a total of £700 million on their credit cards.

How do people get into credit card debt?

Making only the minimum credit card payment and spending more than you can afford to repay are two common reasons people get into credit card debt.

Interest rates

The interest rates on credit cards tend to be higher than on other forms of borrowing. If you don’t pay your credit card balance in full, interest is charged on the remaining amount.

You will see figures advertised as ‘representative APR’. This means at least 51% of customer are getting that rate. How much you pay will depend on your credit score. Credit card APRs are often above 20% and sometimes above 30%.

Minimum repayments

The minimum repayment is the smallest amount you can repay on your credit card bill. It’s typically around 5% of what you owe, or a low figure such as £5. If you don’t make the minimum payment, you’ll also likely be hit with a penalty too, typically around £12.

You may choose to make only the minimum payments if you’re struggling with your cash and need money for something else. But if it becomes a regular habit, the interest can really build up, and the credit card debt will snowball.

Too many cards

Having too many credit cards can cause you to have credit card debt. It may be hard to keep track of which cards you have spent money on, and the monthly payments required.

Having lots of credit cards in your wallet could also tempt you to overspend. And if you don’t have enough money to pay them off, you’ll get into debt.

How does credit card debt accumulate?

Credit card debt can accumulate quickly due to compound interest. This is where interest is charged on top of interest. Credit cards charge this on a daily basis. It’s like a snowball gathering small amounts of snow with each roll. It can grow quickly.

For example, if the interest rate is 24.9% and you have a debt of £1,000 after your monthly payments, you’ll be charged:

Here’s a table showing how long it could take to pay off the debt if you only make the minimum payment, compared with paying off a larger amount. It assumes you start with a £2,500 balance and do not spend any more on the card.

How can credit card debt affect your financial health?

Credit card debt can affect your financial health and your mental wellbeing. It can harm your credit score, making it difficult to borrow money in future. If you have a large amount of credit card debt, it can lead to stress and anxiety.

Credit score

Your credit card provider shares information with credit reference agencies (Experian, Equifax, TransUnion) about the way you use your card. These will use the information to update your credit score.

If you miss a payment, only make the minimum payments, or use a big proportion of your credit limit, this could damage your credit score

If you have a lot of credit card debt, which you are paying off slowly, this could negatively affect your credit rating. A poor credit score could make it harder to apply for credit products and access the best interest rates.

Financial stress

Having credit card debt can be stressful. It can affect your mental health and overall wellbeing. You may be feeling overwhelmed about the debt, and possibly find it hard to sleep or eat.

Debt counselling – also known as credit counselling – can help. This is where you get advice about the best way to deal with your debts. Moneyhelper, Citizens Advice and debt charities such as StepChange and National Debtline can provide help if you’re feeling stressed about your credit card debt. We have listed other sources of help available too.

Is credit card debt a bad thing?

Credit card debt is not always a bad thing. Take interest-free credit cards, where you get 0% interest on purchases for a number of months. You may rack up a balance of say £2,000, but as long as you can repay the debt before interest is charged, it’s arguably a smart way to borrow money.

Having a small amount of credit card debt can also improve your credit score. If you make payments on time every month, it can indicate you’re a responsible borrower, boosting your rating.

It’s worth thinking about your debt-to-income ratio. This is the amount of your monthly income used to pay off debts such as credit cards, loans, car finance and mortgage. If your income is £2,000 and your debts are £1,200, you divide £1,200 by £2,000 and multiply by 100 to give a ratio of 60%.

The lower the figure, the better. A ratio of 60% is considered high, which may mean you struggle to pay your bills and your credit card debts are causing you stress. A lower figure below 40% is seen as a good ratio.

How to pay off credit card debt

The task of paying off your credit card debt can feel daunting, so well done if you’ve decided to tackle it. That’s the first step. Here are some more steps to help with credit card debt:

Add up what you owe and check the interest rates

Tot up everything you owe on a credit card. Compare this with your take-home pay to give an idea of how much you could potentially repay each month.

If you’ve got more than one credit card, jot down how much you owe on each, and what you repay each month. Then make a note of the interest rate on each card.

Prioritise the most expensive credit cards

If you’ve got more than one credit card with debt on it, list the balances starting with the highest interest rate. Now you can see which card costs the most and you can start to pay it off as a priority.

Say you have two credit cards each owing roughly £700. One has an introductory interest rate of 0%, and the other charges 25%. It makes sense to clear as much of the £700 debt charging 25% interest before the rival card that doesn’t cost you a penny in interest.

Try and pay more than the minimum

You may be regularly paying the minimum payment, but can you pay more? If you make a bigger payment, you’ll pay less interest overall, plus you’ll clear the credit card debt faster.

Check your income and outgoings to see if you have room in your budget to increase your payment. If you can, set up a direct debit for a fixed credit card payment each month. It means you won’t forget to make a payment, and you’ll get used to the higher amount of money leaving your account each month.

Consider a balance transfer

A balance transfer is where you move a credit card balance to another card. The new credit card typically has low or zero interest for an introductory period, such as six months. There may be a transfer fee of around 3% when you apply.

Despite the fee, if you have a lot of credit card debt at a high interest rate, a balance transfer card could help you cut the amount you pay overall. Try and pay off the balance before the promotional period ends to avoid high interest rates kicking in.

Speak to your credit card providers

If you’re still unsure how to pay off your debts, don’t bury your head in the sand. Contact your credit card company and explain your situation.

They may be able to freeze interest and other charges, pause card repayments, and/or agree a repayment plan with you. Financial Conduct Authority (FCA) guidance states that credit card firms must help customers who are in persistent debt or at risk of financial difficulties.

Get advice

If you’re still having problems paying off your credit card debt, try not to worry. There is lots of help and support out there. Moneyhelper, Citizens Advice and debt charities like StepChange and National Debtline have helpful guides and tools on their websites, and you can also speak to someone for guidance on debt and repayments.

They can help you create a budget, advise you about different solutions (including debt consolidation) and set up a repayment plan.

Can credit card debt be written off?

You may be able to write off credit card debts via an insolvency solution such as bankruptcy, debt relief order (DRO) or individual voluntary arrangement (IVA).

Each solution is different and has its benefits and drawbacks. They will all have a serious impact on your credit file.

It’s a big decision writing off credit card debt, so get advice first.

Prevention: how to use credit cards wisely

You can prevent yourself getting into debt by using your credit card wisely. Aim to pay off the entire balance each month, to avoid paying interest. If you can't do this, pay as much as you can. Set up a direct debit so you don’t forget and miss a payment.

Budgeting for credit use

Create a budget to work out how much credit card debt you can pay off each month. If you have several debts, try and prioritise them (if you’re behind on paying your rent or utility bills, pay those first).

Regularly review your budget and try and find ways to reduce expenses and boost your income, so you can pay off more of your credit card debt.

Understanding terms and conditions

It’s important to understand the small print with your credit card. There will likely be fees for missing a payment, withdrawing money from an ATM or going over your credit limit.

If you’ve got an initial interest-free offer, make a note of the date it finishes. Be aware that interest rates can change at any time. Your credit card provider must give you 30 days’ notice of this.

The importance of emergency savings

If you have savings, it could make sense to dip into them to pay off your credit card debt. This is because the cost of your debt is usually much higher than savings interest.

However, make sure you still have some money set aside for emergencies. If you don’t have an emergency fund, plan to start one once you’ve cleared your debts. Aim for at least three months’ worth of essential outgoings in an easy-access account.

Summary: Credit card debt

Credit card debt can be a financial headache, but there are ways to manage and reduce it effectively. This includes budgeting and making more than the minimum payment. You might also consider using a balance transfer card and getting expert help.