Credit card debt

One of the most common types of debt our clients come to us with is credit card debt. It’s easy to see why; they’re an easy way to borrow, a simple way to pay, and if used properly they can be a helpful way of spreading the cost of bigger purchases.

Having said this, credit cards can also be an easy route into debt if you’re not careful. Aside from having high interest rates, some cards can take a long time to pay off if you can’t afford to pay your card’s balance in full, and often have expensive charges for late or missed payments that can quickly add up.

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Types of credit card

  • Credit cards

Standard credit cards are the most common type of credit card. They’re issued by banks, and you have to apply either online or in-branch to get one.

You’ll have a credit card limit, which is the maximum you’re allowed to spend on the card. Spending above this means you may have to pay charges on the card, and unless you pay your balance off in full, you’ll be charged interest on what you’ve borrowed every month.

  • Debit cards

Debit cards are different to credit cards in the sense that you can only draw out money you’ve already got in your account, rather than borrowing. If you try to draw out money that you haven’t got, your card may be declined, or you might go into your overdraft facility.

  • Store cards

Store cards allow you to buy items on credit from a retailer, and work similarly to credit cards. Anything you spend on your store card might begin to charge interest if you don’t pay it back within a certain timeframe.

What happens if I don’t pay my credit card debt?

If you don’t pay your credit card debts, then your credit card company will take steps against you in order to recover the money you owe.

Step 1

At first, your card provider will contact you over the phone or by letter regarding your credit card debt. They may do this multiple times over the comings weeks and even months. You’ll need to make at least the minimum payment on your credit card debt to avoid them taking any further action.

Step 2

If you don’t pay after your provider has asked you for payment, your account will default and your card may be cancelled. You will be asked again to pay what you owe.

Step 3

Further non-payment of credit card debt after your card has been cancelled may lead to you being contacted by a debt collection agency.

How do I pay off credit card debt?

There’s more than one way to pay off credit card debt, and there are several steps and methods you can use to make doing this easier.

  • Assessing your finances

Before you start paying anything off, it’s helpful to look at your incomings, outgoings and spending habits in detail. Look at areas where you can reduce your spending – having more money spare in your account at the end of each month means you’ll be able to put more towards paying off your credit card debt.

  • Which debt do you want to pay off first?

Do you want to pay off all your credit card debts as quickly as possible, or would you prefer to pay less in interest? Depending on which statement is true for you, there are multiple repayment methods you could use to pay your debts off.

  • Balance transfers

Using a balance transfer involves transferring all of your debts to a card with a lower-interest card, meaning that you’ll pay less in total. There may be a charge for doing this, though, so be sure to read the small print on any balance transfers before you do this.

How does a credit card debt affect my credit score?

Credit cards can be both good and bad for your credit score.

If you pay back your balance in full and on time, then having a credit card will actually improve your credit score. This is because making repayments on time shows that you’re a responsible borrower, and aren’t likely to have any problems repaying what you owe.

However, if you fall into credit card debt with more than one lender, or use your card irresponsibly, you may find that your credit score could be negatively affected. Credit card providers give the following information to credit score companies:

  • How much you’ve spent on your card each month
  • What your credit limit is on your card
  • How much money you’ve drawn out from a machine on your card each month

If credit score companies receive negative information about your spending habits, then your credit score will become lower as a result. Likewise, your score will improve if you’re more responsible with your spending; your credit score changes regularly, so you even if you’ve got a poor credit score right now it doesn’t mean you can’t improve it.

Can I go to prison for credit card debt?

It’s highly unlikely that you’ll be imprisoned for not paying off credit card debt. You may be approached by debt collectors and even bailiffs, but you shouldn’t worry that you’re going to be sent to jail because of it.

The types of debt that are enforceable by imprisonment are limited to government debts and criminal fines, not creditor debts. In the unlikely event that one of your creditors tells you that you may be sent to prison for not paying your credit card debts, you should make a complaint against them.

How much interest is charged on credit cards?

The amount of interest on credit cards varies from card to card.

Better deals on credit cards with lower interest are generally offered to people with better credit scores. Cards with higher interest (these can go up to 60% or 70% interest) tend to be offered to people with lower credit scores – lenders view people with worse credit scores as those who are more likely to fall into credit card debt, which is why the better deals aren’t available to them.

As well as interest, credit cards can include costly charges if you go over your limit, so you should consider this before you agree to a new credit card.

I can’t afford the minimum payment on my credit card; what can I do?

If you’re struggling to make the minimum payment on your credit card, don’t panic.

The first thing you should do is contact your credit card provider and explain your situation – they may agree to a more affordable repayment plan, or at least reduce your credit card’s minimum payment.

If you’re struggling with multiple credit card debts, then you might want to consider seeking professional help.. We offer a variety of different debt solutions that can not only reduce the amount you’re paying every month, but could also allow you to write off a proportion of what you owe. You can find out which debt solution is best for you by completing our online debt solution tool.

Persistent debt and minimum credit card payments

There’s nothing technically wrong with making the minimum payment on your credit card, but doing this for an extended period of time can be very costly.

If you’ve been making the minimum repayments on your credit card for a period of 18 months or longer, you’ll be classed as being in what’s called persistent debt. This is because by this point, you’ll have been paying more in interest, fees and charges than your card’s actual balance for 18 months.

The Financial Conduct Authority (FCA) has introduced new rules and legislation to help people who’ve been in persistent debt – if you fall into this category, your bank must contact you to see if you can increase your payments and reduce the amount you’re paying in interest and charges.

Joint credit card debt

Unlike other shared debts, you can’t have a joint credit card that you share with someone else. Your credit card provider might let you have a second credit card for your partner or relative, but the card will still be in your name.

This means that you’ll still be liable for any money spent on the card, so be very careful before you agree to one of these. If anything happens between you and the person who has the card (e.g you split up with your partner) you should call your credit card company and explain the change in situation to them; they should be able to cancel the card if you’re worried about money being spent.

Further reading