Managing Credit Card Debt

If not managed responsibly, credit card use could turn into problem debt.
If you do find yourself in credit card debt, it’s important not to panic. No matter how bad you consider your situation to be, please know that there are steps you can take towards getting your finances back on track.

In our guide to managing credit card debt, thimbl explains what to do if you find yourself in a debt spiral, and how to avoid credit card debt in the future.

What is credit card debt, and how does it happen?

When you spend money on a credit card, you’re borrowing money from your credit card provider. Each month, you’ll need to make at least the minimum repayment amount due on your outstanding balance. As a side note, you should try to make more than the minimum amount if you’re able to, and it’s worth noting that you won’t be charged interest if you clear your balance in full and on time each month.

Problem debt occurs when you fall behind on your repayments. This can happen if you spend more money than you can afford to repay, or your financial situation changes, and you’re unexpectedly no longer able to make your repayments.

What to do if you can’t pay your credit card

If you’re struggling to make your credit card repayments, you should contact your credit provider as soon as you can.
The sooner your provider is aware of your situation, the sooner they can talk you through any options that could be available to help you work through your difficulties.

It’s a good idea to take a step back from using your credit card until you feel more in control of your finances.

How to clear credit card debt

When it comes to paying off credit card debt, there are several options to consider.
We’ve listed some common methods below.

• The snowball method
  Prioritise clearing your smallest debt first and work your way up to the biggest. The snowball method could prove to be a great motivational technique; the buzz of clearing one debt, regardless of how small, could inspire you to keep going.


• The avalanche method
  The reversal of the snowball method, the avalanche method is when you clear your largest debt or your debt with the highest interest rate first and work your way down to the smallest. Clearing your biggest debt will, of course, be tricky, so this may not be the right method for everyone.


• Debt consolidation loan
  A debt consolidation loan is when you apply for an amount of money from a lender and use it to pay off your existing debts. You’ll then repay the loan in monthly instalments over a set term.


• Balance transfer credit card
  A balance transfer credit card, which we’ll look at in further detail in the next section, could help you save money on interest.

Before you decide which debt clearance method could be best for you, you may want to talk to a specialist debt advisor. You can access free, confidential money and debt advice through the following charities and organisations: StepChange, MoneyHelper, Citizens Advice, and National Debtline.

Balance transfer credit cards

Put simply, a balance transfer is when you move the balance of one or more existing credit card(s) onto a new credit card with a lower rate of interest. Some balance transfer credit cards come with a no-interest promotional period.

A balance transfer credit card could help you repay your debt quickly by reducing the amount of interest you owe. If you’re currently paying off multiple credit cards, you might find that streamlining your debts into one place could make them easier to keep on top of.

How does a balance transfer credit card work?

1. If you have one credit card, search for a balance transfer credit card with a lower interest rate.
   If you have more than one credit card, work out the combined interest you’re paying each month and search for a balance transfer credit card with a lower rate than this.
2. Transfer your balance(s) onto the balance transfer credit card.
3. Make one single repayment each month. You should aim to clear your balance before the promotional period comes to an end – please note that any balance remaining on your credit card after this will begin to accrue interest at your credit card’s standard rate.

Balance Transfer Credit Cards: things to be aware of

• You could be charged a transfer fee, so you should make sure that this is less than the money you’ll save in interest long-term.
• Some balance transfer credit cards come with a minimum or maximum transfer amount.
• There could be restrictions on how much of your balance(s) you’re able to transfer. For example, you may only be able to transfer 90% of your credit limit.
• Any money left on your credit card once the promotional period comes to an end will be charged interest at your credit card’s standard rate.
• You’re unable to transfer balances between credit cards issued by the same provider.

How can I avoid credit card debt?

It’s important to take active steps to avoid credit card debt.

1. Before you make a purchase, ask yourself the following questions
   
   • Can I afford it?
   • Is this a need or a ‘nice to have’?
   • Could I find it cheaper elsewhere, for example, on a second-hand site?
   • Could I borrow this item from a family member, friend, or community group rather than buying a brand new one?

   Some purchases can’t be helped; for example, when replacing a broken boiler or covering the cost of urgent car repairs. It’s also okay to treat yourself to ‘nice to haves’ – if you can afford them. Setting and sticking to a monthly budget and being disciplined with your money are crucial if you want to avoid debt.

   
   
2. If you do need to spend money, look at other ways to cover the cost
   A debt spiral can happen when you rely on multiple debts; for example, you’ve spent over your credit card limit, so you apply for a personal loan to cover an emergency expense.
   You should always think very carefully before you use credit, especially if you’re struggling to keep up with existing commitments.
   If you need money urgently, could a loved one help you out? If you have savings, you should consider using these before you apply for credit.


3. Stay within your credit limit
   Your credit limit is the total amount of money you’re able to borrow on your credit card. If you try to spend over your credit limit, your transaction could be declined, and you may be charged a fee by your provider. Your credit score could also be negatively affected.


4. Be aware of your credit card utilisation
   Your credit card utilisation is the amount of money you’re currently using of your credit limit and is shown as a percentage. For example, if your credit card has a £200 credit limit, and you use it to make a £50 purchase, your credit utilisation would be 25%.
   Keeping track of your credit card utilisation could help you stay in control of your spending and avoid debt.


5. In the habit of forgetting to make your repayments? Set up a Direct Debit
   When you set up a Direct Debit, your monthly repayments are automatically taken from your bank account, which could make managing your borrowing easier.

If you’re worried about debt…

Being in debt can be scary and isolating, but please don’t suffer in silence. It’s vital to remind yourself that you’re not alone - 20.3 million people in the UK are financially vulnerable.
Talking about our financial situation can feel uncomfortable, but it shouldn’t be a taboo subject. Whatever you’re facing, it’s important to reach out and get the help you deserve. Several organisations can offer you free, impartial money and debt support, including: StepChange, MoneyHelper, Citizens Advice, and National Debtline.