Paying off your credit card

Using a credit card for your spending can have many benefits, from added legal protection to cashback or collecting loyalty points at your favourite retailer. However, credit card debt can quickly mount up if you don’t pay your card off in full each month. Here’s how to stop that happening.

Cut the cost of your credit card debt

Credit card debt is expensive. Bank base rates are the lowest they have ever been at 0.5%, yet the average interest rate charged on a credit card is 18% APR (annual percentage rate). Transferring your balance to another credit card that charges a lower interest rate may help reduce your monthly payments.

Balance transfer your existing credit card balance

Top tip

Make sure you pay off your debt before the 0% interest rate deal runs out, otherwise you may have to pay a high rate of interest on the remaining debt.

One option for borrowers with existing credit card debt is to move it to a balance transfer credit card. These cards offer a period in which no interest will be charged on that debt, meaning that every penny of your repayments goes directly towards reducing the size of your original debt.

You will need to pay a fee to transfer your debt over, usually around 3% of the balance transferred (subject to a minimum fee level), so if your outstanding balance is £1,000 it will cost you £30 to switch.

These cards are usually only an option if you know you have a good credit rating.

Using low-APR cards to pay off your credit card debt

If you feel you will need longer than the interest-free period offered by balance transfer cards in order to pay off your debt, then an alternative option is a low interest rate card (or low standard rate card). These cards offer a much lower rate of interest than most credit cards, allowing you to pay off your debt quicker. In addition, some low interest rate cards will not charge you a fee for transferring your balance over.

Google “low standard rate credit cards” to find the lowest APR card you can.

Don’t let the fact that your interest payments have gone down prevent you from trying to pay off your debt as quickly as possible. Indeed, if you maintain your current repayments levels and your interest rate is lower than it was, then the balance will be paid off sooner.

Go to the Which? website to compare credit card ratesopens in new window

Don’t stick to minimum payments

Pay it off every month

Join the 60% of people who now pay their credit card balance off in full every month.

Source: Research by Money Supermarket (2012)

Minimum monthly repayments tend to be set at very low levels, sometimes as low as 2% (although for cards taken out after 1 April 2011, the minimum payment must always cover fees, interest and charges plus 1% of the amount you owe). If you only make the minimum repayment your debt could take decades to pay off and in that time you could pay thousands of pounds in interest.

  • Aim to pay off the entire bill each month so that you will not pay any interest at all. With a standard credit card, if you always pay off your monthly bill in full, you can enjoy between 45 and 59 days of interest-free credit.
  • If that’s not possible, pay off as much as you can and work out a repayment plan. Don’t use the cards for cash withdrawals.

Set a budget

Putting a budget in place allows you to take control of your money. It’s just a record of the money you have coming in and what you have left to spend each month.

Once you’ve done this you should be able to identify areas where you can reduce your spending.

The money that you save can then be put towards repaying your credit card debt.

Prioritise your debts

If you have debt on more than one credit card, you will need to work out which one to pay off first.

You should focus on the most expensive credit card debt first. If, for example, you owe £1,000 on a card charging 19% annual interest and another £1,000 on one charging 34% annual interest, concentrate on the card charging 34% interest first and pay as much as you can.

Once the debt is cleared from that card, you can then look to pay off the credit card charging 19%.

Make sure you continue paying at least the minimum payment on the cheaper card(s) throughout. Otherwise missed payments will damage your credit rating and you will probably have to pay extra fees.

Do not stop or reduce payments on any loan or credit commitment secured against your house or on rent and utility bills as these must take priority over credit card debts.

Pay by Direct Debit

Setting up a Direct Debit for your credit card payments will ensure you never forget to pay. It also means that you will not be charged a late payment fee, or have your interest-free period removed if you have an interest-free card.

Set up a Direct Debit now, preferably to pay the full amount every month automatically. If you can’t afford this, you can set up an automated payment for more than the minimum.

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