Bank of England figures show that we owe £55billion on credit cards and this is a debt that is proving very difficult to shift. With millions of borrowers paying off only the minimum amount each month, this money could take decades to repay.
Credit card providers insist that you pay back some of what you owe each month but with many only requiring a minimum repayment of between 2% and 5% of the outstanding balance, this often barely covers the interest you are charged.
Why it's best to pay more than the minimum
If you have money leftover at the end of each month, once all the essential bills are paid, consider putting it towards your debt - even a small amount could make a massive difference.
For example, let's say you made a balance transfer of £3,000 with the market-leading Capital One Platinum Credit Card. This offers 0% until September 2009 on both balance transfers and purchases and would give you the maximum 0% period to chip away at your debt - after paying the 3% balance transfer fee. Once the interest-free period expires, you will be charged the standard rate of interest, which is typically 12.9%. If you made the minimum monthly repayment on the card each month (3% or £5 whichever is greater) it would take you an incredible 15 years to pay off the balance and you'd pay an additional £960.22 in interest.
In contrast, by paying just £10 over the minimum each month on the same credit card, you could halve the time it takes to pay off the balance - down to seven years and eight months. The overall interest paid would fall significantly too, to just £550.15 - a saving of more than £400.
The more you're willing to pay each month, the more you'll save. Paying £50 above the minimum each month would slash the interest paid to just £143.09 over three years and one month.
There are huge savings to be made no matter which card you take out. For example, the Halifax One Online Special offers 0% on balance transfers for 10 months and has a typical APR of 15.9% and a balance transfer fee of 3%. It would take you 32 years and eight months to clear a debt of £3,000 - if you made just the minimum repayment each month (2.0% or £5 whichever is greater). This would add £3,854.02 to your debt in interest. However, add just £10 to your minimum repayments each month and you more than halve the interest and the time it takes to clear the debt - down to £1,730.80 and 12 years and four months respectively.
The Post Office Platinum Credit Card offers 0% on balance transfers for 10 months with a typical APR of 15.9%. It has a balance transfer fee of 2.75% and shows that by shopping around, other good deals are also available.
What if you can't afford to pay more than the minimum?
An additional £10 a month can go a long way - but if you really can't afford to pay more than the minimum, then don't panic, you still have options.
The first is to move to a different 0% balance transfer card as soon as the introductory offer expires - you can get an overview of the 0% offers available in our credit cards section. This should be the cheapest option, depending on the size of the balance and whether the credit card company charges a fee, but it's also very time-consuming and relies on discipline to switch your cards as soon as the 0% deal ends. The Capital One Platinum Credit Card, mentioned earlier, is the market-leader with nearly 15 months 0% on both balance transfers and purchases, with a 3% balance transfer fee. The Virgin Credit Card also offers 0% on balance transfers for 15 months, with a lower balance transfer fee of 2.98%, but has a purchase period of just three months - so don't spend on the card as the interest on purchases will build up after the three-month period.
If you don't qualify for the leading 0% balance transfer cards, perhaps because you have a poor credit rating, or you have a higher than average balance, then switching your balance to a low 'life of balance' card is another good way to cut interest payments. These rates are fixed until you have paid the debt off completely - currently the Barclaycard Life of Balance Card is the market-leader with a balance transfer rate of 6.5% and a typical APR of 15.9%. Remember, however, that whichever card you opt for, not to use it as an excuse to keep on spending - you could make the situation much worse.
Another alternative is to take out a loan to consolidate your debts. If you do not have the self-discipline to use low-rate credit cards to repay your debt, or don't want the hassle of switching cards every year or so, a loan could be a better option. You may pay a higher rate of interest, but at least you know exactly how much you need to repay each month to be debt-free after a certain length of time.
For loans above £1,000, Barclaycard Personal Loan offers a competitive typical rate of 7.3%, while for loans between £7,500 and £15,000, Moneyback Bank - owned by Alliance & Leicester - has a typical rate of 7.6%.
What if your debt is more extreme?
Some people will find it impossible to clear their debts using loans and credit cards because they have over-borrowed and simply owe too much.
An increasing number of people are finding themselves in this position. Our site editor Clare Francis spoke to James Dean from Debt Matters, a debt solutions company, about the growing debt crisis and asked him what people who are struggling financially can do to get back on track. Click here to watch the interview.
If you have a high amount of unsecured debt - say £10,000 or more - and can't feasibly repay or service this amount there are still two options available to you.
Debt management plans are an alternative to consolidation in that they have the same goal of reducing monthly repayments and rolling debts into one easier to manage sum, with the advantage of not taking on any additional finance.
Arranging a debt management plan involves negotiating debt payments with lenders, outlining an income and expenditure schedule, showing how much 'spare' money is available after priority payments are made and proposing a fair distribution of this money. At the same time, a request is made for further interest payments to be dropped. You can do this yourself with self-help books available from National Debtline or your local Citizens Advice Bureau.
However, you may prefer to contact a specialist debt solutions company such as Debt Matters, Think Money and Baines & Ernst, to negotiate with lenders on your behalf and administer payments. They do charge a fee, typically in the region of 15% of the monthly repayment, for this service. For this fee they will help manage what can be a difficult and time consuming process.
Alternatively, if your debt level is one you can't afford to repay, perhaps even the minimum monthly repayment is a struggle, then an Individual Voluntary Arrangement (IVA) may be something to look into. Remember this requires specialist advice as an IVA is a legal agreement between you and your creditors. This agreement will outline a repayment programme, based on what you can realistically afford to repay, and will then bring your debt to a close after an agreed period - normally five years.
An opportunity to wipe out a proportion of your debt may sound tempting, but there are serious consequences to consider: if you're a homeowner you may need to remortgage and use the equity to pay off the debt and if you fail to meet the terms of the IVA, your creditor might choose to begin bankruptcy proceedings.
IVAs require serious thought and good advice. It's best to shop around for an insolvency practitioner you're comfortable with and who understands your individual circumstances. Our debt section includes listings for many IVA companies including Debt Advisory Line, which currently has a 10/10 product rating from the customer reviews on our site.
For more debt advice check out our debt guides; or for some free advice contact the Consumer Credit Counselling Service or your local Citizens Advice Bureau.
Have your say: Have you sucessfully managed your personal debt? Share your experience, ask for advice, discuss the best providers and their products and find a solution in our forum.
THINK CAREFULLY BEFORE SECURING DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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