A guide to tackling credit card debt

Getting into debt can be worrying, especially when you’re unsure how to pay it off. Read our guide on how to get on top of your finances by reducing your credit card debt.

Getting into debt can be worrying, especially when you’re unsure how to pay it off. Read our guide on how to get on top of your finances by reducing your credit card debt.

Anelda Knoesen
From the Money team
5
minute read
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Posted 7 DECEMBER 2020

How to deal with credit card debt

We can help you understand how to access your credit card debt, budget your finances effectively and monitor your credit score as you reduce your debt.

Review your finances

If you’re struggling with debt, the first thing you’ll need to do is review your finances. The easiest way to do this is to add up your income and outgoings, ie your bills and average spending, and work out a budget. Some banks offer free budgeting tools or you can use free budgeting apps to see where you can reduce your outgoings.

Setting a budget also helps you to see where your spending can be reduced. Any savings you make can be put towards paying off your credit card debt.

Assess what kind of debt you’re in

Reviewing your finances will help you to assess whether you’re in a ‘debt crisis’ or whether you have large debts. A debt crisis is when you’re unable to pay your basic outgoings, such as rent. It’s not defined by how large your debts are, but your ability to keep on top of all your minimum payments.

Large debts: if you have large debts, while keeping on top of your minimum payments, you’ll need to put together a plan to start paying off your debt. This can include consolidating your debt and negotiating interest rates with your credit card provider.

Persistent debt: this is defined by the Financial Conduct Authority (FCA) as a continuous cycle of persistent credit card debt for three years or more. The FCA now requires credit card providers to work with persistent debt customers to help them pay off their credit card debt quicker, rather than simply suspending their card after 36 months of persistent debt (although this may be done as a last resort). Providers should encourage customers to speak with them about repayment plan possibilities.

If you’ve been in persistent credit card debt for three years, you’ll most likely receive a letter from your creditor. The best course of action here is to speak directly to your lender and explain your situation. They have to consider your circumstances and see if you can both come to an understanding. If you can’t afford their payment terms but show willing to get your debt cleared, they may be prepared to reduce or even cancel interest, fees or other charges.

Debt crisis: if you’re in a debt crisis and looking for advice, you can speak to a debt counselling agency like National Debtline. They could place you on a debt management plan and negotiate with creditors to freeze interest rates on your behalf.

They may point you towards an IVA (individual voluntary arrangement), debt relief order or even bankruptcy. While this can write off a percentage of your debt, this is a decision that should not be taken lightly as it will heavily impact your credit score.

If you’re in a debt crisis, you may need to prioritise your debts by whichever has the biggest consequence if you miss a payment. For example, receiving a County Court Judgment (court order to pay money that you owe) or missing a payment on your mortgage could have a bigger consequence than a late payment charge on a credit card.

Prioritise your debt

If you have multiple credit cards, paying off the debt with the highest interest rate, instead of the highest outstanding balance, could save you money on interest. This is known as the avalanche method.

Pay off one card at a time, starting with the most expensive one. Once you’ve cleared that debt, move onto the next highest interest rate card, and so on.

Just remember that you must keep up the minimum repayments on all your other credit cards.

Consolidate your debt

If you have multiple lines of credit, such as credit cards, an overdraft and loans, you may be able to consolidate these debts into one monthly payment. This can help to lower your monthly repayments by spreading the debt over a longer period.

Ways to consolidate your debt include:

Balance transfer cards can help you pay off outstanding credit card debt by moving the balance from one card (or multiple cards) where you might be paying interest, to a new card with a 0% interest rate for a set period of time. However, it’s important that you clear the balance before the interest-free period ends.

Money transfer cards allow you to transfer cash into your current account, which you could then use to pay off a credit card, reduce an overdraft or loan, or cover any other expenses.

Debt consolidation loans come in two forms: secured and unsecured. If a loan is secured against your home, you could lose your home if you don’t make the repayments. When you take out an unsecured debt consolidation loan, your assets (property) are not at risk if you fail to make the repayments. This is a higher risk to the lender, so you’ll need a good credit score to get this type of loan.

Be aware that taking on a new debt is a big decision, as extending the term of your debt can incur more interest and cost more in the long run.

Negotiate interest rates

You may be able to negotiate lower interest rates with your credit card provider, if you have a good credit score and make your repayments on time. If your interest rate is reduced by even just one or two per cent, this could save you hundreds of pounds a year.

Monitor your credit score

Your credit score may be negatively impacted if your debt has led to late payments on your credit card or you’ve gone over your credit limit. Credit monitoring lets you keep track of your credit score on a regular basis when you’re trying to rebuild your credit score. Some credit agencies offer free constant access to your full credit report, others require a monthly fee.

If you’ve kept up with your minimum repayments and have stayed within your credit limit, you may have a good credit score even if you have large debts. This can put you in a better position to consolidate your overall debts at a lower interest rate, so it’s always good to check your credit score.

Credit card debt and coronavirus

The coronavirus (COVID-19) pandemic has caused financial difficulty for many people. If you have a credit card and you’re worried about making repayments due to coronavirus, we’re here to help you understand the options available.

Read our guide to credit cards and coronavirus for updated information on the options available for credit card holders during the pandemic.

Our top tips for managing your credit card debt

  • Set up a direct debit so you never miss a payment. If you can, set it up to pay more than the minimum payment each month.
  • Don’t use your credit card to withdraw cash. You’ll be charged higher interest and additional fees.
  • If you’ve got a 0% transfer card, avoiding using it for purchases as these aren’t usually included in the interest-free deal.

 

Compare credit cards

If you’re considering consolidating your credit card debt, it’s a good idea to compare cards from some of the UK’s most trusted providers. You can compare credit cards quickly and easily using our comparison service.

When you compare with us, we’ll only show you credit cards and loans you’re likely to accepted for, without damaging your credit score.

For more advice if you’re in debt, get in touch with your bank or contact a debt counselling agency or charity such as Citizens Advice, National Debtline or StepChange Debt Charity.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

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