Avoiding Credit Card Debt
Credit card providers make their profits from your debt. If you wish to avoid debt, take advantage of all the benefits and flexibility that a credit card offers but be conscientious and pay off your outstanding balance in full and on time. There are a few precautions to take to avoid falling into debt on your credit card: only spend what you know you can afford, pay more than the minimum monthly repayment, and limit your use of fee-paying additional services (see Avoiding Specialist Services).
Only Spend What You Can Afford
A credit card can be a useful addition to your financial portfolio; it offers you an interest-free period within which to 'borrow' money for purchases. However, if you do not have the available funds to pay off the amount you spend, you will incur interest charges. It may be that you wish to spread the cost of a purchase over a few months, and have factored the interest charges into the actual amount to be repaid. This is fine in the short term, but credit cards carry large interest rates and should therefore be avoided for long term borrowing (for long-term borrowing options see Personal Loans). Personal loans typically have interest rates up to 11 % lower than your credit card. Remember, a credit card will not automatically create debt: you can only fall into debt if you borrow more than you can afford to repay.
Minimum Repayments
If you only make the minimum repayment on your outstanding balance each month, you will not be able to clear your debts quickly. The minimum repayment amount is very small, typically just two percent of your balance, which means that you would just need to pay just £40 on an outstanding balance of £2,000. If you take into account a typical monthly interest rate of 1.4 %, £28 of the £40 repayment goes on paying off the interest. This means that you are only reducing your debt by £12. Even if you increase your repayment by a small amount, and pay off more than the minimum, you can reduce the time it takes to pay off your debt by years. For more details of the dangers of minimum repayment see Minimum Repayment.
Keep Your Card Provider Informed
If you feel that you may miss a repayment, but it is a short-term problem, you should inform your card provider of the situation. If, for example, you have a good record of repayment but have been suddenly made redundant, informing your card provider of the situation may allow them to waive a late repayment charge if you agree to pay within a few days. You should also consider whether a family member or friend would be able to pay off the debt that is earning the most interest.
