Problem one: You don’t know what interest rate your card charges
Credit cards are one of the most expensive forms of borrowing you can find. Yet more than half of those who fail to clear their credit card balance in full each month, don’t know what annual interest rate (APR) they’re being charged, according to a report by credit reference agency Equifax.
It follows that without knowing your credit card’s APR, you don’t know how much interest you’re accruing – so you don’t know how much (or little) impact your monthly repayments are having on your balance.
Solution: Find out!
It sounds obvious but the first step is to face the music and find out what APR your credit card charges. It’s clearly printed on your most recent bill or you can find it on the provider’s website or by calling. Then use the Money Advice Service’s credit card calculator to find out what you need to pay to clear the debt. But, as we explain next, this will need to be more than the minimum repayment your credit card provider requires.
Problem two: You’re only making minimum payments
As long as you’re only making the absolute minimum payments on your credit card balance (typically 3% of the balance or £5, whichever is the greater), it’s going to take you a long time to shift it.
Using the national average APR of 17.32%, here’s a sobering example. If you have a balance of £1,500 and only make minimum monthly payments of 3% (£45), it’s going to take you a whopping three years and nine months to clear the balance, and you’ll pay £501 just in interest for the privilege – more than a third of what you originally borrowed.
Solution: Pay more than the minimum
Paying more than the minimum is a must when it comes to getting shot of a credit card balance. To take our earlier example of a £1,500 debt, if you increased your monthly payments by just £5 you would clear the debt six months faster and save £69 in interest overall.
So the trick is to pay as much as you possibly can each month to shift the debt faster. Better still, clear your balance with a 0% balance transfer card and don’t pay interest at all.
Problem three: Your 0% balance transfer period has expired
Balance transfer credit cards are great for giving yourself some breathing space to pay down your debt, but if you rest on your laurels and let the 0% period end before you’ve cleared it, the APR will soar, the interest will start racking up again, and your debt will be harder to shift.
The representative APR on each of the top five 0% balance transfer cards available at MoneySuperMarket, all rocket to 18.9% (variable) once the initial interest-free periods end. So it you’ve let your balance linger beyond this point, you’ll be paying through the nose in interest again.
For example, Barclaycard Platinum Credit Card with Extended Balance Transfer offers a market leading 28 months interest free (for a reduced fee of 2.99% until September 30), which means you’d need to pay £77 a month to clear the average transferred balance (£2,143, according to the British Bankers’ Association) within the interest-free period. But after month 28, the representative APR rockets to 18.9% (variable).
Solution: Keep transferring your balance
Some balance transfer cards may be beyond your reach – either because you don’t meet the qualifying criteria or because you already have debts on other cards from the same issuer. For example, you can’t transfer a balance from a Barclaycard to the Barclaycard Platinum Credit Card with Extended Balance Transfer.
Luckily, there are plenty of other good balance transfer deals on the market right now, so you can keep transferring the debt until it’s all paid off.
For example, the Halifax Balance Transfer Credit Card offers 0% on balance transfers for 27 months for a 2.7% fee. The NatWest and Royal Bank of Scotland Platinum cards each also charge no interest on balance transfers for 27 months for a 2.99% fee. Finally, the Tesco Clubcard Credit Card for Balance Transfers won’t charge interest for 27 months, subject to a 3.15% fee.
You’ll have to either clear the debt within 27 months or transfer it again though, as each of these cards (except the Tesco one) charges a representative APR of 18.9% (variable) once the interest-free period ends. Tesco charges a lower representative APR of 16.9% (variable).
Problem four: Your poor credit score means you can’t shift your balance
Your credit score is a record of how you’ve handled credit in the past. It’s used by lenders to assess how responsible a borrower you are, and whether they should give you credit.
When you use credit properly and responsibly, i.e. paying your bills on time, your credit score improves. When you fail to keep up with credit repayments, your score is damaged. You can also have a low credit score if you’ve never really borrowed anything before, as potential lenders don’t yet have enough information about you as a borrower to make a decision.
A poor credit score or limited credit history could prevent you getting the most competitive balance transfer deals.
Solution: Take steps to improve it
The first port of call is to address your credit score so you can improve it. Head over to our credit monitoring channel to find out how to get a copy of yours.
Here are some simple things you should do to kick off:
- Check you’re on the electoral roll
- Correct any errors with a Notice of Correction
- Cancel any dormant credit cards
- Stop applying for credit deals you’re unlikely to get
And it might sound counter-intuitive, but you can improve a poor credit score by being credit-active. For example, using a credit card can help to build your credit rating, as long as you make timely payments and stick within your credit limits.
There are still some credit cards you can apply for with an under-par credit score. For example, the Barclaycard Initial card – which you can read more about here – will reward you with a lower interest rate after 12 months if you manage the card well. However, if you pay off your balance every month, the APR should not be a concern. As the purpose of the card is to build up your credit rating, it’s probably also best to avoid the five months’ 0% offer on new purchases too.
Problem five: You’re racking up unnecessary charges
Any good work you do paying down your balance suffers a setback every time you incur a charge for not using your card wisely.
For example, your credit card issuer will charge a fee for late payments and defaults. There’s an easy fix to this – all you need to do is set up a standing order or direct debit to pay AT LEAST the minimum amount each month automatically.
You shouldn’t use a credit card to withdraw cash from an ATM. If you do, you’ll be charged a one-off fee up front (based on a percentage of the withdrawal) and an inflated rate of interest from the day you withdraw the cash.
Also, unless it’s a card designed specifically for overseas use, you should avoid using your credit card abroad. Overseas spending credit cards come with low or non-existent foreign purchase fees and cash withdrawal fees, but your average domestic credit card can charge a fortune if you use it outside of the UK.
Solution: Keep how and where you spend in check
If you need a card for your holidays, you’d be better off going for something like the Halifax Clarity Credit Card (representative APR 12.9% variable) which charges no foreign purchase or cash withdrawal fees, anywhere in the world.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct