Understanding credit card debt

There are very few people in the UK who do not have some form of credit card service to hand and while this does not necessarily mean you will face financial problems in the future, you do need to be aware and understand how credit card debt works. The vast majority of people will spend money and pay off their balance at the end of each month but as the financial situation continues to tighten in the UK we are seeing more and more people paying off less and less of their outstanding debts at the end of each month.

Annual Percentage Rate (APR)

All credit card arrangements and credit card correspondence has to by law show the annual percentage rate applied to your debt and any penalties which have been received. However, many people do not seem to realise that while an annual percentage rate figure shows what you can expect to pay an annual basis, interest is actually charged on a monthly basis. Thereby, unless you pay off your outstanding balance at the end of each month you will see an interest charge added to your balance on which interest will be charged in the future.

It is therefore easy to see why some people fall into the financial trap of leaving a balance at the end of each month upon which interest is charged and then interest is charged upon the interest, etc. If your balance is fairly large for a relatively short period of time you can see the interest charge increase significantly.

Minimum payments

Each and every credit card available in the UK will have a minimum payment requirement which will be a certain percentage of your outstanding debt that needs to be paid on a monthly basis. If you do not pay the minimum payment you will be subjected to fines and penalties which will be added to your outstanding debt and, again, upon which interest will be charged in the future. Minimum payment penalties will vary between each card provider but even if the charge is £20 and you underpay your minimum payment for say six months then this will be an added £120 on your debt.

Very quickly fines, penalties, interest charges and other administrative fees can add up and for some people the ability to repay their outstanding debt in the short term suddenly disappears.

Your cheap debt is paid off first

While the authorities are looking to put through a number of regulatory changes in the short to medium term you need to be aware that for example if you have a 0% transfer balance to a new credit card and then spend additional money, which balance is paid off first? In a perfect world you would hope that the balance which attracts the interest charge is paid off first but unfortunately this is not the case. In many cases any capital repayments you make on your credit card debt will go towards the 0% transfer balance first thereby leaving your interest charging balance to increase.

This financial wizardry makes the UK credit card industry millions upon millions of pounds a year because once you have transferred over your 0% transfer balance you are likely tied in for a set period of time and dependent upon your provider. Each and every credit card provider in the UK is different therefore you should check the small print before you actually sign up and before you transfer any debt to a new credit card.

When cheap debt turns to expensive debt

It is very easy to flash your flexible friend when you are out and about in the knowledge that at the end of the month you will pay off your outstanding balance and everything will be fine. However, when you compare the interest rates on the average UK credit card, in the high teens (and over 20% in some cases!), this is very expensive debt compared to overdrafts and personal loans. Many people automatically assume that credit card debt, assuming you pay off your balance at the end of each month, is relatively cheap, and in this situation it is, but the truth is that credit card companies want you to spend money so that they can make money.

If there is very little in the way of a gap between your income and your expenses then you do put yourself at risk of financial problems in the future if the economy as a whole was to change. If you see a squeeze on your income and your expenses increase then there may come a time when you are not able to pay off your credit card debt at the end of each month. Even if you leave a relatively small balance you would be charged interest upon this and very quickly only the minimum payment will be a real option for you. This will leave more and more debt on your credit card at the end of each month, increase interest charges and very quickly the situation can run away from you.

Keep your spending under control

One of the simplest ways to ensure you do not overspend on your credit card is to leave it at home once in awhile. This may sound absurdly simple but the truth is that if you do not have access to your credit card then quite simply you can’t spend on your card. It is very easy to flash your credit card at Christmas, birthdays and other special occasions but in the past, before credit cards were so common, many people would have saved up for these special occasions. Is there really anything wrong with saving up for a special occasion and cutting back on your expenditure in the short term?


While millions upon millions of people in the UK have access to credit cards there are many who do not fully understand the workings of the credit card industry. You need to be aware of which debt is repaid first, i.e. the lowest interest debt, any penalties, the APR and how quickly a situation can move out of control even if you miss just a couple of months of payments. Credit card debt is by far and away the biggest problem for the UK insolvency industry and despite warnings from the government and various consumer agencies it seems that many people are still happy to jump into bed with their flexible friend.

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