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Credit card repayments - what you need to know

Richard Bayston

Richard Bayston
Feb 16, 2017

Owning a credit card can be useful.

They’re one of the smartest ways to make midsize purchases, because under Section 75 of the Consumer Credit Act the card company is jointly liable for purchases between £100 and £30,000, meaning you can claim your money back from them if you get ripped off.

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And they give you budget elasticity with more protection than other financial products like payday loans.

But they come with some pretty hefty downsides too.

Making credit card repayments can become a cycle of debt.

This happens because the interest rates are compound, and they’re often very high.

Right now, baseline rates from the bank are the lowest they’ve ever been, around 0.25%.

But typical credit card interest hovers at 18% or so.

Here's what interest rates some of the top credit card providers charge:

* Aqua Classic Card - 29.7%
* Sainsbury's Bank - 18.9%
* Vanquis Visa - 39.9%
* Capital One Classics - 29.8%
* Ocean Finance - 34.9%
* Virgin Money - 19.9%

(Source: http://www.money.co.uk/credit-cards.htm)

Some credit cards, especially from lenders outside the traditional banks, come with interest rates around double the average, like Vanquis’ 39.9%, which guarantees that any debt will grow rapidly.

In general, the easier a card is to get, the higher the APR will be.

Compound interest means you pay interest on the interest: Borrow £100 on a credit card in January, and you owe £118 in February - the original sum, plus 18% interest.

In March, you’ll owe £139 - £118, plus 18% interest. By the end of the year, your £100 debt has become £728.

In December, the additional interest for the month will be higher than the initial spend.

So if you’re a credit card user, it’s vitally important to stay on top of your repayments, to make sure you’re not stuck trying to keep up on the interest on a bill that’s spiralling out of control.

 

How can you stay on top of credit card repayments?

First, remember that a credit card is a borrowing instrument: you’re taking out a high-interest loan.

If you know for sure that you’ll be able to repay the initial spend before the month’s end, that’s fine.

Otherwise, consider a loan with easier interest rates. Banks will often give you an extended overdraft or personal loan, and other lenders rarely charge as much interest as a credit card.

Whether you manage to pay it off before you incur interest or not, always pay credit card debt first.

It’s the credit card debt that has the potential to spiral out of control, as well as to damage your credit score and cut off access to other loans.

If you have poor credit history, a credit card can be used to partially repair it. This also works for people who are either so young or so prudent that they have no credit history, which can also work against you!

The way this works is that you make purchases on the card, then immediately repay them.

That way, you never incur any interest, and you build a history of responsible borrowing that gets paid back quickly. (Beware: the easiest cards to get with bad credit are also those with the highest interest rates).

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What about if you already have credit card debt?

One way to handle this can be to get another credit card.

I realise this sounds a lot like robbing Peter to pay Paul, but bear with me.

If you can find a card that offers 0% interest on balance transfers, you can use it to transfer your credit card balance to the second card.

Yes, you’re essentially paying off one debt with another; the difference is, you’re now not paying any more interest.

These deals can last as long as three years.

If you’d borrowed £100 in January and were facing the prospect of paying £728 in December, that’s a big difference - and splitting £728 across three years would leave you making monthly payments of £20.24, which is pretty easy to deal with.

Make sure you make the payments, though. Any remaining debt will begin to grow again when the 0% deal runs out.

If you can’t use an interest-free balance transfer, it might make sense to move debt from a high-rate card to a lower rate one.

But be careful that you don’t end up hopping from card to card without dealing with the debt itself.

While you’re paying the interest on any credit card, you’re in a race you can’t win.

Look for other ways to get your repayments to a manageable level.

Personal loans are one option as the interest rates are far lower than the rates on credit card debt. They're typically available for between 12.5% and 5.2%, significantly lower than any credit card - though not as low as an interest free balance transfer.

For smaller credit card debts, consider going into your overdraft - or even your savings.

Remember, the sooner you get your balance to zero, the sooner you get out from under the compound interest.

If none of these is possible, try contacting your credit card supplier.

Remember they want you to pay: if you make the case that you won’t be able to meet the current repayment schedule, they might offer a more reasonable one.

If your credit card company isn’t treating you fairly, you can always use the leverage of a consumer champion like A Spokesman Said to push them to do the right thing!

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