Figures from the Bank of England show household debt has hit a staggering £1.5trillion, with the amount of unsecured credit - borrowing on credit cards and personal loans now rising at the fastest rate since 2005.
But worryingly, over two thirds of credit card holders say they don’t know how their cards work - with thousands unaware of their monthly spending and 10% oblivious to how much interest they're paying, despite living the red, according to MoneySupermarket.
Meanwhile, two thirds have not checked their credit score in the past year, with a fifth not knowing how to do so, effectively leaving them exposed to 'high interest credit cards' which can add thousands to their initial borrowing.
Lenders use credit scores to determine who qualifies for a credit card, and at what interest rate and credit limit. The better a credit score the lower the interest rate lenders will approve you for. But, the lower you score, the higher the interest is likely to be.
For example, taking a credit card with a £3,000 balance, a typical rate for an ‘Excellent’ borrower would be 5.94%. If just 4% of the balance was paid back every month, it would take 9 years and 7 months to pay off the full balance, with total interest of £400.
However, a borrower with a ‘Very Poor’ credit score might typically secure a rate of 49.94%. With a £3,000 balance paid off 4% each month, it would take 42 years and 3 months to pay off and an unbelievable £14,179 accumulated interest.
Millions of those in the red are also completely unaware of 0% balance transfer deals that can help clear expensive debt cheaply and quickly, setting households back in the black sooner rather than later.
Kevin Mountford, banking expert at MoneySuperMarket, comments: "With almost two-fifths of credit card holders owning more than one card, and many admitting they don’t truly understand the terms and conditions, it’s easy to see how debt could spiral out of control.
"Many people will use their credit card at this time of year which, if used wisely, can help spread out the cost of big purchases, offer protection on purchases and help improve your credit score.
"However, if used badly you could incur unnecessary charges, end up in debt and damage your financial reputation – making it harder to get credit in the future. It’s worth taking the time to get to grips with your credit card so you avoid a financial hangover in 2017.”
How to avoid credit card charges- Always pay off your balance. You should always aim to pay off the balance of your credit card in full each month to avoid paying interest.
- If you can’t pay in full, at least pay the minimum. If you don’t, you’ll get charged a late payment fee, usually £12, and get a negative mark on your credit file. The best way to avoid this is by setting up a direct debit to ensure your credit card payments are always made on time.
- Don’t use your credit card to withdraw cash. We are well accustomed to withdrawing cash from an ATM with our debit cards and not having to pay a fee – but don’t get caught out by assuming the same rules apply to your credit card, as you will usually be hit with a charge of around 3% of the amount you take out. On top of this you’ll also be charged interest, typically at an annual percentage rate (APR) of around 28% from the second you make the withdrawal.
- Don’t go over your credit limit - If you do you’ll get charged. If you have always managed to keep within the limit and only exceed it accidentally by a few pounds, contact your credit card provider as soon as possible and ask to waive the fee.
- If you're trying to pay off debt, and are stuck in a catch 22 of eye-watering interest charges, you can avoid these fees by moving your money to a 0% balance transfer credit card. We've rounded up the top 0% balance transfer credit cards for length of transfer, the balance transfer cards with the lowest fees and the best balance transfer cards for people with bad credit.
If you are struggling to manage your finances don’t ignore things. Tackle your finances now before things spiral out of control.
- Go through your budget and see if there are any things you can cut back on to save a bit of money.
- Make sure you are not overpaying on any of your basic bills. It’s simple to switch on to better energy deals or insurances. Compare prices and deals via sites including moneysupermarket.com, uswitch.com , gocompare.com and confused.com.
- If you are paying high interest on credit card think about switching to a 0% balance transfer deal - there are cards available with up to 42 months interest-free. But, ensure you make repayments on time each month or the 0% offer will be stopped immediately and you'll be hit with high interest charges.
- Do a benefits check to ensure you are not missing out on any financial help you are entitled to via turn2us.org.uk .
- If you cannot get the situation under control yourself then don’t delay in getting free, independent advice.
- Book an appointment with a debt adviser at your local Citizens Advice or visit citizensadvice.org.uk.
- Call the National Debt Helpline on 0808 808 4000.
- Contact StepChange Debt Charity on 0800 138 1111 or via stepchange.org.
- PayPlan, 020 7760 8976 or payplan.com , offers free debt advice and a fee-free debt management plan.
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