Credit card debt
Credit card debt. What to do if you have got credit card arrears.
Credit cards are a popular way to buy items online and in shops and pay the money back in instalments later.
Use wisely and be useful, but not doing neither of these things, they can be an expensive way to loan and can take a very long time to repay.
In this section you will find advice about how to pay off credit card debt. We will also highlight on what you can do to help manage your credit card debt.
What happens if I have credit card arrears?
If you do not pay the minimum payment every month, your account will go into arrears. Your creditor will contact you to demand the missing payments that have not been paid. If you do not make an immediate payment, eventually the account will default and further action may be taken.
For more information on what action a credit card provider can take to collect a debt, see our section on what your creditors can do.
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Joint credit card debt:
The law only allows a credit card account to be in one name so there is no such thing as a joint credit card. However, your credit card provider may let you have a second credit card for your partner or someone else to use.
If your card provider has given you a second card, you will be liable for all of the money you have spent on both cards.
The second card holder is not liable for any of the debt. Even if the money you have spent is on the card with their name on it.
For this reason, we advise you to think twice before asking for a second card.
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What if I make just the minimum payments?
All credit cards have a minimum amount that you must pay back each month.
This will be a percentage of the amount outstanding, usually between 1% and 3% each month. Usually there will be a minimum amount of £5.
For example, if you owe £1000 on your card a minimum payment of 2% it would mean paying back £20 per month.
If you only pay the minimum payment on a card, it will take a very long time to repay. Always try to pay more than the minimum amount if you can afford it.
Credit card limits
Some cards are targeted at people with a poor credit history and have a low limit of £200. Often these cards have a high interest rate, but if you pay them back on time, it can be a good way to boost your credit rating by proving the other creditors that you can be trusted.
Other cards have a much higher limit which can reach up to thousands. Whether you have a low or high credit limit, it is very easy to run up debts that are affordable which will get paid back for a very long time.
Sometimes, your card provider will offer to increase your credit limit, especially if you have a good history of payments. You should think very carefully before agreeing to an increase in your credit limit and refuse the increase if you do not need it. Some people like a higher limit but there is always that temptation to keep on spending and run up a debt you eventually cannot afford to pay back.
How expensive are credit cards?
Interest on credit cards varies from less than 10% to 70% or more. The rate of interest you are charged with will depend on what card you have, which is often determined by your credit rating.
Some cards give you an interest-free period of up to 60 days on purchases. This means if you purchase something and pay off the whole amount within this time you will not get charged at any interest.
But some card providers charge interest on purchases straight away which most will do with the money you have withdrawn from a cash machine but if you miss any payments, you will get late payment charges on top of the interest. These should be no more than £12 for each missed payment.
What is a credit card balance transfer?
Some credit cards will allow you to transfer the balance from another card. Transferring a debt from a card with a high rate of interest to one with low or 0% interest could help you pay off the debt faster.
But low or 0% interest credit cards are hard to get if you don’t have a good credit rating. This means you cannot rely on balance transfers as a way to deal with your credit card debts.
Also look out for fees when transferring a balance. Most credit card providers charge 2-3% of the amount you are transferring as a one-off fee. If you are transferring a balance to take advantage of a lower interest rate, the fees may mean you are saving less than you expect.
If you do transfer a balance, make sure you cut up the old credit card and close the account. Otherwise you may get tempted to keep spending on both cards and you will end up with two debts.
How does a credit card affect my credit file?
Your credit card provider will share information with credit reference agencies about the way you use your card. This information will help other creditors decide how risky it is to lend money to you.
Like all debts, your credit file will show details about your credit card debts:
- The balance you have owed
- Your payment history
- Whether your account has defaulted or not.
- Your credit limit
- How much you have spent each month
- How much money you have withdrawn from a cash machine each month