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Your credit card – friend or foe?

20th September 2018

Our author Jo Thresher discusses how to have a healthy relationship with your credit card:

Is your credit card your friend? It might be, it might not.

Do you pay it off every month without going overdrawn or taking out a loan? Do you get some sort of cashback reward? Then it’s your friend.

Alternatively, if you only pay the minimum payment every month, or only a little over the minimum, do you know how much interest you are paying? If you only pay minimum payments on a credit card balance of £5000, with 20% APR, it will take almost 32 years to pay off! However if you paid a fixed amount of £100 it would take 8 years, a quarter of the time. So think carefully about the monthly payments you are making.

For cards taken out after 1st April 2011 the minimum payment must always cover fees, interest and charges plus 1% of the amount you owe. However on older credit cards minimum monthly repayments can be set at very low levels, sometimes as low as 2%. If you only make the minimum repayment on these your debt could take decades to pay off and in that time you could pay thousands of pounds in interest.

As you can see credit cards could be your enemy and it might be worth changing the way you view this sort of debt so that you can reduce and eventually get rid of it to ensure a happier future. What could you do with that extra money? Believe you can get out of debt and you will. Can you move this debt to an interest free card? Is there a lower rate out there? Then work out a repayment plan. The Money Advice Service offers a useful online calculator to help you with this.[1]

Credit cards can be really useful, but unless you are really disciplined they will bite back. Using them for emergencies only is great, but it may be better to have an emergency savings fund instead. Then you don’t have to pay interest on an emergency which could push you into a debt spiral.

If you enjoyed this post you can find lots more great advice from Jo in her book Being Better With Money.

[1] https://www.moneyadviceservice.org.uk/en/tools/credit-card-calculator

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