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Use credit sparingly to avoid a debt hangover

Use credit sparingly to avoid a debt hangover

Category: Credit cards

Updated: 05/07/2016
First Published: 05/07/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Credit cards have long been established as a popular payment method and are currently celebrating their 50th birthday in the UK. But while they can often be beneficial, they need to be used sparingly. Thanks to increasingly tempting credit card limits – Barclaycard estimates that the average limit is now a staggering £4,000 – borrowers could find themselves falling into a spiral of long-term debt, so we've got a few tips to help you avoid a debt hangover.

Helpful strategy…

It can't be denied that credit cards can be helpful if used wisely, particularly if you ensure that you grab a good deal and at the very least pay more than the minimum repayment each month. Ideally, you'd want to pay off the full balance each month, thereby giving you a way to budget and benefit from this convenient method of spending (and even benefiting from cashback if your deal offers it) without needing to worry about interest.

Indeed, there's now considerable variety in the credit card market, which means that borrowers have more opportunity than ever to find the perfect card for their borrowing needs. Interest-free credit cards are great for those who are looking to spread the cost of a larger purchase or debt, while low rate purchase cards are a straightforward choice for those who are planning more regular spending. Hunting down a best buy deal will also ensure that the card works in the borrower's favour – see the table below, compiled by Moneyfacts, for more details.

Average Rates Jul-06
Jul-15 Today
Average credit card purchase rate (APR) 15.3% 21.2% 22.3%
Average 0% introductory purchase term 200 days 254 days 279 days
Average 0% introductory balance transfer term 230 days 539 days 596 days
Best Deals Jul-06
Jul-15 Today
Best low rate purchase card (APR) Barclaycard - 6.8% Lloyds Bank - 6.4% AA - 6.4%
Best 0% introductory purchase card GE Money - 12 months Santander - 23 months Sainsbury's Bank - 27 months
Best 0% introductory balance transfer card GE Money - 12 months Barclaycard - 36 months Halifax - 40 months
Source: Compiled 05/07/2016

Best buy deals shown are for new customers

… when chosen wisely

"Credit cards are a shining example of how consumers embrace payment methods that save them time and money," said Rachel Springall, finance expert at Moneyfacts. "However, this useful bit of plastic doesn't always come cheap. Most credit cards on the market currently charge 18.9% APR, which is well over double the rate on the best low rate credit card. In addition, the average purchase APR has steadily risen over the years to its present all-time high of 22.3% APR."

The savings that can be made when choosing the best possible card really can speak for themselves. For example, our calculations show that borrowing £4,000 on a card charging 18.9% APR will cost £1,097 in interest, and the debt would linger for two years and 10 months if a repayment of £150 is made each month. However, if a borrower opted for a credit card charging 6.4% APR, the lowest rate currently on the market, and made the same repayment, then they would save £780 in interest.

And, if they used the best 0% purchase credit card and paid back the debt before the offer ended, then they could avoid accruing interest charges altogether – but you still need to make sure you stay in control.

"The real danger with credit cards is that consumers can become too comfortable with debt," added Rachel. "Larger credit limits mean that it's too easy to innocently increase the amount of money owed, and this can lead to a never-ending vicious cycle of debt.

"Certain measures, such as stopping automatic credit limit rises and alerting customers when deals end, could help borrowers manage their debt. Another helpful feature would be for card providers to encourage borrowers to pay more than the minimum repayment each month."

While these measures would no doubt be beneficial, don't rely on providers to keep you on the right track. Instead, you'll want to be truly organised to make sure you don't get stuck in a cycle of debt – start by trying to pay off as much as you can each month (or ideally the full balance), and if you've got an interest-free deal, make sure you know when it expires and work out how much you need to pay off each month in order to clear the balance.

And, if you get offered a credit limit increase, think seriously about whether or not you want it – or need it. Having the extra credit available could be a temptation you simply don't want, and although increases are automatic, you can still tell your provider if you don't want it. Above all, be sensible and try to stay in control, and hopefully you'll avoid a debt hangover in the future.

What next?

Compare the top credit cards to find one that meets your spending needs

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.