Credit card debt can be a misery

Anybody who has ever dreaded the arrival of their next credit card bill will know what misery it can cause to feel snowed under by credit card debt. It is something that affects a significant number of people in the UK, who have -unwittingly or otherwise – run up a massive credit card debt and then found themselves unable to pay it.

A flexible – but expensive – friend

One thing with a credit card balance is it can keep mounting and mounting even if the holder isn’t doing any spending. This is because the interest rates are usually high – significantly higher than would be charged on a personal loan for the same amount – and also because the methods used to calculate interest often charge different rates on different types of borrowing.

Spend, spend, spend…

For example, using your card in a straightforward purchase, such as buying a dress in a clothes shop, would be charged at one rate of interest. On the other hand, if you use the card to withdraw cash from an ATM, you will usually be charged a higher rate of interest on that particular amount.

…then pay three different rates of interest

Not only that, but the small print often dictates that the monthly payments received from the cardholder will go to pay off one particular component of the total debt before others. In practice, the payment will usually be towards the lower-interest parts of the cumulative debt, such as shop purchases.

This means that the card holder can often end up paying a higher rate of interest on cash borrowings from the time of the initial withdrawal right up until finally clearing the card balance.

OFT to investigate credit card interest rates

Earlier this week, the Office of Fair Trading (OFT) announced that it would be introducing "a new programme of work with the credit card industry and consumer bodies to make the cost of credit cards easier for consumers to understand".

The announcement followed the receipt of a "super-complaint" from Which?. The consumer group claims that consumers are being misled by claims that the range of methods used to calculate interest means they have more choice.

According to Which?, most people do not understand how the interest rates are calculated and so are not capable of making an educated decision about which card to choose. The OFT will be looking at the cost of credit for credit cards, including purchases, cash advances, introductory offers and payment allocation.

"Credit card pricing has become increasingly complex"

John Fingleton, OFT chief executive, said: "Credit card pricing has become increasingly complex, with many new dimensions such as interest free periods. While these new pricing dimensions give additional choice and value to consumers, they can make it harder for consumers to make informed decisions.

"This work will consider how pricing information might be improved so as to enable better product comparison by consumers, without stifling valuable competition and innovation that benefits consumers."

Credit card debts "a burden"

One person who well knows what it is like to be stuck in a more of credit card debt misery is singing sensation Paul Potts, the recent winner of the ITV series Britain’s Got Talent. Potts, who until winning the show was working as a manager for a mobile phone retailer, had credit card debts of £30,000.

Last week, he told Wales on Sunday how he had run up the debts after suffering numerous health problems – including a burst appendix, a huge tumour on his adrenal gland and a shattered collarbone – which left him out of work for two years. Potts said that the debts were a burden and it would be a "relief" to be able to pay them off with part of his £100,000 winnings.

How do I get out of debt?

  1. Don’t dwell on it – things will only get worse unless you take action
  2. Draw up a list of priorities for your spending and your debts – what are you really spending your money on?
  3. Your mortgage or rent payments should be your main priority – we all need a roof over our heads so make sure this is covered first by your monthly income. Could you save by re-mortgaging? Compare mortgages today
  4. If you’re entitled to benefits, don’t forget to claim them!
  5. Consolidating your debts into one loan can help you to cut monthly repayments and boost your wealth. MoneyExpert.com has a Debt Consolidation calculator to see what you can save.
  6. If you’re not sure where to turn for advice, a good place to start is the Citizen’s Advice Bureau.
  7. Beyond that, you may need to take professional advice. Make sure you find someone independent.
  8. Are you paying interest on your credit card? Move to a 0% balance transfer card and SAVE.

Remember, you should wherever possible look to pay your debts off as quickly as you can. The longer you borrow money for the more interest you will pay.

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