Credit card debt: How to manage your finances

Credit Cards

Credit cards offer the twin benefits of convenience and security – which is probably why there are about 60 million of them in circulation in the UK at the moment.

The convenience comes because they allow shoppers to make expensive purchases and defer the payment to later in the month or spread it over a longer period – whichever is easiest. In terms of security, purchases on credit cards also offer much greater protection from fraud.

Yet credit card debt can become an issue if people become over reliant on ‘the plastic’.

In the UK as a whole, credit card debt stood at £64.4 billion in April. That’s the equivalent of £2,387 per household.

 

 

When to use a credit card

We’ve already outlined how credit cards attract users with their convenience and security. What does this mean in practical terms? Well, say you want to purchase a television or three-piece suite and you want to use money from your savings. You can pay for this up front on a credit card and then transfer the funds from your account at a later date to clear this debt. You could also use your card to buy something before pay day, for example, and then pay this off once your salary comes into your account.

Some cards also come with an interest fee period when you first take them up. If, for example, you wanted to buy a holiday costing £2,500 you could use a card to pay for this and then pay the balance off over the course of the interest free period.

Most credit cards won’t let you borrow more than £5,000. The need for greater funds than this – which, as Avant Credit points out, could include scenarios such as debt consolidation or home improvement – is one of the key reasons for getting a loan instead.

On top of all of these, this post from Confused.com also explains how it is possible to use money transfer credit cards to give your bank account a boost.

Follow these practices to stay in control of your credit card spending. Straying from these will make it tough to manage your spending.

 

What to look for when taking out a credit card

You need to make sure you fully understand the rules surrounding your credit card before you take it out.

As Citizens Advice highlights, there are a number of things you need to consider:

  • APR – The annual percentage rate is the cost of borrowing should you not pay off the full balance each month.
  • Minimum repayment – The amount you MUST pay each month.
  • Fees – Some cards carry an annual fee. Don’t let this catch you out.
  • Charges – Want to use your card abroad? Keen to understand what will happen if you are late with a payment? You need to know what the charges will be before you begin.
  • Introductory offers – When does your introductory offer run out? What will the interest rate be after this? Make sure you know before you start.
  • Rewards – Have you picked a card provider because of the offer of perks when you spend in certain shops? Make sure you know how you will accrue points and what these points will get you in the long run.
  • Cash back – Some cards offer cash back to your card, depending on certain conditions. Again, you must understand these conditions properly so that you don’t end up chasing a benefit that isn’t all it’s cracked up to be.

You need to know all of the above to be able to manage your money properly.

 

 

How to pay it off properly

If you’ve taken a credit card out to capitalise on an interest free period, make sure you have a plan to pay off the balance in full before the interest kicks in. Otherwise, try to clear as much of your balance as you can, thus limiting the amount of interest you’ll pay.

Don’t treat the minimum payment as the amount you should pay. Paying this will barely dent the full cost. Ideally, you should set up a direct debit up so that you can guarantee you’ll neither miss a payment or be tempted to just pay the very minimum.

 

Balance transfer

If you have credit card debt, and your interest free period has lapsed, then it might be worth setting up a balance transfer. This involves taking a new card with a fresh interest free period that you can pass this debt over to. By doing so you’ll ensure you can chip away at the balance without pouring your money into servicing the interest on your debt.

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