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Friday, 5 October 2012

Credit cards and debt

If you're over 18, and using a credit card, it's important not to run up large debts. The charges on amounts overdue are high and can quickly spiral out of control. If you're having problems meeting your credit card bills there are steps you can take.

Avoiding the credit card debt trap

Credit cards are a popular way of borrowing money because you can repay the amount you borrow in smaller amounts over a long period of time. However, some people fall into the trap of using credit cards to pay for the cost of everyday living. If you do this, your monthly payments will start to stack up and you might run the risk of spiralling into a debt that can often reach into the thousands.

If you're going to take out a credit card, plan to repay what you owe in full at the end of each month.

If you don't pay off the full amount every month on a credit card, you'll be charged interest on the whole lot - not just the outstanding amount. The rate you pay will vary depending on what the APR (annual percentage rate) of the credit card is.

Annual percentage rate (APR)

All credit card companies have to quote an APR. This helps you compare products with each other. It takes into account the total cost of borrowing, including:

  • the total amount of interest you'll pay
  • any additional charges - eg a monthly fee for taking out the card
  • when and how often you must pay the interest

But the APR doesn't take into account charges you might have to pay, like a charge for missing your monthly repayment.

The interest rate of any credit card should be clearly displayed on any application form and promotional leaflet, so make sure you know how much you'll be charged if you're not going to pay your balance off in full.

Balance transfers to reduce credit debt

Many credit card companies offer zero per cent interest rates as an incentive to move your outstanding credit card balance to their credit card.

If you have a large balance on your credit card and are struggling with high interest payments, balance transfers can be a useful way of making a small dent in your debt. But, remember, it can't solve overall debt problems.

The interest free period only lasts for a certain amount of time - usually six to nine months - and if you have money left on your account after this date, you'll be charged interest as normal.

If you are transferring a balance, you should always read the small print on the application form. Although your outstanding balance may not be charged interest during the introductory period, interest on any new purchases that you make will quickly stack up.

If you do want to do a balance transfer, it's a good idea not to make any purchases with your new card. This way you'll be able to make the most of the zero per cent offer.

Transfer fees

Some credit card companies also charge a balance transfer fee to take over your outstanding debt. This can be charged as a flat fee or it may depend on the amount that you are transferring. If you are planning to transfer your existing balance to another card, make sure you know whether you'll be charged for doing so.

Store cards and debt

Most department stores now have cards that you can use to pay for goods over a period of time. They work in the same way that credit cards do, but often charge higher rates of interest and can only be used to pay for goods from that chain of shops.

Store cards usually offer a discount or a free gift on your first purchase to persuade you to apply for one. Remember that unless you plan on paying off the full balance straight away, they can often work out to be twice as expensive as credit cards.

Credit card alternatives

So what's the best way to avoid credit card debt?  The obvious answer is to plan your budget and try not to spend more than you earn. When you do have spare cash, look at ways of making it work harder for you, for example by checking out tax-free savings accounts.

With the extra interest, you might be able to go on a shopping spree without filling out that credit card application.

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