Even though my finances are often under strain, it has been many years – possibly going on for 15 – since I had an outstanding debt on a credit card. And long may that continue. Unless you’ve got a 0% deal on your card, then if you don’t pay off the bill in full you’re going to be hit by a huge amount of interest. Pay off just the minimum and the debt is going to take many decades to pay off.
So it’s good news this week that City watchdog the Financial Conduct Authority has just published new rules which could mean those with credit card debts aren’t overwhelmed by them. The FCA rules (companies have until September to implement them) will save cardholders around £1.3 billion a year in interest and fees. There are about 3.3 million UK customers who are always in the red on their credit cards and the FCA says they pay around £2.50 in interest and charges for every £1 of debt they repay.
The new rules mean card companies will have to communicate with customers once they’ve been in debt for more than 18 months. They will have to advise their customers to pay off their debts faster. If they are stuck in debt for 36 months or more then lenders will have to offer more help – which could include suspending interest. What’s good about these rules is that they acknowledge the danger of cardholders only repaying the minimum every month. If you do this, you might think you’re reducing your debt but actually, you’re really just adding to them.
The FCA calculates that if you have a £3,000 debt on a credit card with an APR of 19% and make only the minimum repayments (which would start at £74 a month and reduce over time) then it would take you 27 years and seven months to clear the debt – and in total, you would have paid £4,192 in interest (on top of repaying the £3,000 debt). But if you paid back £108 a month then you’d clear the debt in three years and pay £879 in interest.
That’s substantially less, of course, but it’s better not to build up the debt in the first place. Given that you earn nothing on savings at the moment, use them to pay off any credit card debt. You could alternatively move the debt to a 0% balance transfer card (there are plenty around: see Moneyfacts here for a list) but for this idea to work you MUST clear it by the time the 0% deal ends. And you’ll only get a 0% deal if you have a good credit record – which you might not have if you’re in the red.
And see our guide to credit cards here