Credit Card Debt Guide

What is credit card debt?

You accrue debt whenever you use your credit card to make a purchase. Your debt will start to accumulate and grow with interest being added each month if you don’t pay off your balance. This is how debt can build very quickly. 

The main problem with credit card debt is the added interest. 

What is interest?

Interest is the fee credit card companies charge you for borrowing money. It is calculated as a percentage of your balance (how much you’ve borrowed/spent). 

Here’s how it works:

1. You borrow money on your credit card by making a purchase. 
2. If you don’t pay back what you borrowed by the end of the month, interest will be added.
3. If you spent £100 that month and have 10% added interest, you’ll now owe £110. 
4. Interest will continue to be added each month until you completely clear your balance. 

You could end up only paying off the interest with your minimum monthly payments and not even scratching the surface of the debt itself. 

Debt can be intimidating and stressful but thankfully there are options for those struggling with credit card debt.

How to clear credit card debt

Many different methods can help clear your credit card debt. Not all of these solutions will work for your situation so only pick the ones that will help you. Seek financial debt advice with a professional if you are ever unsure or need help managing your finances. 

1. Use a 0% balance transfer card

You can do a balance transfer to shift your high-interest debt from an existing credit card to another. 0% balance transfer cards won’t charge you interest for a set period of time, sometimes for up to 36 months. 

Using a balance transfer card can be beneficial as you’ll be paying off your actual debt each month, not just the interest. This is a great way to make an impact on your credit card debts. 

One thing to note is that 0% balance transfer credit cards aren’t easy to get approved for if you have a poor credit rating. So, use the card’s eligibility calculator before applying to see if you are likely to be approved. 

Once the interest-free period is over, you will be charged interest on your remaining balance. So, the key to balance transfer cards is to clear your balance before the 0% period ends.

To learn more about 0% balance transfer credit cards, read our comprehensive guide.

2. Prioritise the most expensive debt 

If you have multiple credit cards, you may have different debts you need to pay off. You should always focus on paying off the most expensive debt first. If your cards have the same interest rate, just focus on the highest debt.

If your credit cards have different interest rates, focus on clearing the card with the highest interest rate first. For example, you might owe £2,000 on a card charging 20% interest and another £2,000 on one charging 30% interest. Concentrate on paying off the card charging 30% first.

Remember, you’ll still have to carry on meeting your minimum monthly payments on any other credit cards you have. 

The best way to clear credit card debt is to tackle the most expensive one first and clear the cards one at a time. As you clear more cards, you’ll start having more and more spare money to pour into paying off your remaining debts.

3. Talk to your credit card provider 

If you can’t get a 0% balance transfer card and you’re struggling to pay off anything more than the minimum each month, it will be a good idea to speak to your credit card provider. 

You can talk to your lender about a credit card repayment plan which will help you to focus on clearing your debt. If the monthly payments on this plan are too high, you can always discuss a more reasonable plan with your card provider. 

If you can’t afford to pay more than the minimum payments to the lender each month, you can ask that they freeze the interest on your card. If the debt is considered unaffordable, lenders will sometimes freeze interest. However, this will mean that you won’t be able to carry on spending on the card as it’ll rack up more debt.

Your credit card lender isn’t out to get you, they want to treat you fairly as you are the customer! Speaking to your provider could result in reduced interest rates, a fair payment plan and a soothed mind. 

What is ‘persistent debt’?

Persistent debt is defined by the Financial Conduct Authority (FCA) as paying more in interest on your credit card over 18 months than you pay towards reducing the amount borrowed.

For example, you might have borrowed £3,000 on your credit card. Your total added interest is now £300. So, you owe £3,300 on your credit card. If you are only paying the minimum amount each month, you might only be paying £20, for example. So, you aren’t making an impact on what you borrowed, only the interest. As each month goes by more interest will be added on top, meaning that the debt isn’t going down at all. 

You will receive a persistent debt notice if you’ve only been making the minimum payments on your credit card debt for 18 months. Credit card providers encourage their customers to clear their credit card debt quicker by sending these notices.

Persistent debt notices are sent in the following order:

• First letter comes after 18 months - your credit card provider will write to you, encouraging you to pay more if you’ve only been covering interest for 18 months.
• Reminder comes after 27 months - you’ll receive a follow-up from your provider encouraging you to pay more towards your debt.
• Action required after 36 months - if you remain in ‘persistent debt’ for three years, then your credit card provider will write to you again, requiring you to take action. This action could be agreeing to a repayment plan. Or, you can get into contact with your provider to discuss why you can’t pay more. 

Whilst getting persistent debt letters can be worrying, it doesn’t mean that there isn’t a way out of credit card debt. There are many possible solutions that we will discuss in this guide. 

I’ve received a persistent debt ‘action letter’ - what now?

If you’ve been in ‘persistent debt’ for 36 months then you’ll receive an action letter. This letter will want you to increase your monthly credit card payments and might threaten credit card suspension if you fail to do so. 

Action letters can seem scary but you don’t necessarily need to take any action at all. If you’re meeting your minimum monthly credit card repayments each month, you aren’t breaking your contract and so you can’t be forced to pay more.

Doing nothing isn’t the best course of action, however. Your best bet is to talk to your lender and discuss your situation to see if you can come to a plan or agreement. 

Again, don’t panic, there are several different options you have if you are struggling with credit card debt which we will discuss below. 

What happens if I can’t pay credit card bills?

If you don’t make the minimum monthly payment on your credit card, several things can happen. 

• Your credit card provider will get in touch to chase the missing payments. 
• You will be charged a penalty fee for the late/missed payment and it will be marked on your credit history. 
• If you still don’t make the payments owed, your account will default - this will happen if you’ve missed payments for three to six months.
• If you still can’t pay, debt collectors may be called upon.

These extreme actions tend to only be taken if you miss credit card payments for several months in a row. If you know that you are going to miss a monthly payment, letting your lender know in advance is the best way to avoid fees. 

What to do if you’re going to miss a payment

If you know you are going to miss a card payment, you should follow these steps:

• Contact your credit card company as soon as possible and let them know why you are going to miss a payment. 
• Your provider may give you a grace period which will give you time to make the payment after it was due. 
• If you pay during the grace period, you won’t be charged any penalties. 

What if I can only afford the monthly minimum payment?

Paying the monthly minimum could mean you are only paying interest each month and not the debt itself. This is because, if you don’t completely clear your credit card debt each month, interest will be added. This interest will soon mount up as your debt grows. This is why paying the minimum amount isn’t always the best idea. 

If you only pay the minimum amount for 18 months, you will start receiving ‘persistent debt’ letters, encouraging you to pay more.

Paying the minimum amount isn’t breaking your credit card agreement and so you cannot be punished for it. However, you will end up paying off debt for years and may never get your balance down. Therefore, it’s worth taking a look at our suggestions in this guide to try and get that debt down. 

What are the different types of credit cards?

There are several different types of credit cards, all of which have different drawbacks and benefits. All of our credit card guides are listed below. You can find out more information about the credit card you currently use or one you are thinking about getting. These guides offer advice on how to avoid misuse of credit cards and building debt. 

• Best credit cards 2020
• 0% purchase credit cards
• Balance transfer credit cards
• Rewards credit cards
• Airline credit cards
• Cashback credit cards
• Travel credit cards
• Credit cards for bad credit
• Student credit cards

How credit card debt affects your credit score

Unpaid debts and missed payments account for 35% of your credit score with most lenders. This means that your eligibility for credit can be reduced if you have a great deal of debt or have missed credit card payments in the past. 

Your outstanding credit card debt also decreases your credit score. This is because if you have a lot of debt, it’s likely that you are using a significant amount of your available credit limit. Credit card providers like to see your ‘credit utilisation’ below 25%. If you have high debt and high credit utilisation, then this could negatively impact your credit score. 

To learn how to improve your credit score with credit-building credit cards, read our guide.

How to avoid credit card debt

If you are worried about getting into credit card debt, then follow our golden rules to stay on top of your credit card balance. 

Rule #1: Set and stick to a budget 

Having a credit card doesn’t mean you have free unlimited money to spend. You should only spend what you can afford to pay back each month to avoid interest. Interest will be added to whatever balance remains at the end of the month which will begin to build up and form debt if you don’t clear it.

Only you know exactly how much you can afford to pay back each month. So, work out your outgoings and what you’ll be using your credit card for. Then set aside that amount each month so you know you’ll clear it without fail. 

Rule #2: Set up a direct debit 

If you set up a direct debit to pay off your credit card each month, you know that you’ll never forget or miss a payment. You can set up a direct debit to completely clear your card each month if you’ve worked out how much you will be spending. 

Remember, you need to make sure that you’ve got enough in your account each month to pay off your credit card. 

Rule #3: DON’T just pay the minimum

Minimum payments on a credit card can sometimes be as low as 2% of your total balance. It can be tempting to only pay this small amount each month as it’ll hardly be noticeable to you and you can continue borrowing. However, this will hardly dent your debt and it’ll slowly begin to grow and accrue significant interest. 

Before you know it, you’ll be stuck in a cycle of debt, never paying off your actual balance and chipping away only at interest each month. 

ALWAYS pay off as much as you possibly can each month to prevent yourself from falling into debt. 

Rule #4: Be wary of 0% interest

Some credit cards will come with 0% interest on purchases and/or balance transfers for a set period of time. Whilst this is a great way to borrow without paying interest, high-interest rates will be added once the 0% period ends. 

This is why you should always pay off your balance before interest is added because then the perks of having a 0% card will be wiped away. 

Set multiple reminders in the months and weeks before the 0% period ends.

Rule #5: Don’t have loads of credit cards

The more credit cards you have, the more chances there will be for you to get into debt. It’s easy to be tempted to overspend if you have thousands of pounds in available credit at your fingertips. 

Avoid taking out too many credit cards as you could get into unnecessary debt and managing your monthly bills could get confusing!

I can’t meet my minimum credit card payments due to coronavirus. What should I do?

Coronavirus has put a financial strain on many. If you have a credit card and are struggling to meet your minimum repayments, you may be eligible for help.

The Financial Conduct Authority (FCA) has introduced measures that allow you to request a freeze on credit card repayments for 6 months. However, you may still be charged interest in this period.
You have until the 31st March 2021 to request a freeze but make sure you agree with your lender before stopping repayments. This won’t leave a bad mark on your credit history either due to the exceptional circumstances.

If you can afford to keep paying, it’s best to do so as you will still be charged interest during this holiday period.

All payment holidays must end by 31st July 2021.

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