The Ultimate Guide to Understanding Credit Card Debt

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The Ultimate Guide to Understanding Credit Card Debt; man smiling at laptop

Whether you’re making in-store purchases or ordering online, credit cards are most people’s go-to way of paying.

However, with the ease of contactless and ever-looser bank checks, overspending and unexpected financial challenges can quickly result in credit card debt.

If you’re struggling with credit card debt, know that you’re not alone. 

While credit cards are convenient, not paying the full amount each month can easily lead you into credit card debt. As a result, it’s important to stay on top of your credit card statements and bills.

In this guide, we dive deeper into understanding credit card debt, explain how it works and look at some helpful tips to pay it off quickly.

Let’s begin!

What Is Credit Card Debt?

Ordinarily, using a credit card is a secure and flexible method of payment. It allows you to borrow money to spread the cost of major purchases and comes with Section 75 protection, allowing you more peace of mind.

However, the risk of credit cards comes when you’re not able to make your minimum payments or start running up bills you can’t afford to pay back. This can lead to a cycle of spending more than you can afford, where using credit cards irresponsibly also leads to debt. 

Understanding Credit Card Debt

Before you can begin reducing your credit card debt, it’s helpful to know how it works. Each month, you receive a credit card statement that lists all the retailers and costs of your purchases. 

Depending on your selected credit card, you have between 21-25 days from the date you receive the monthly statement to the due date. 

Typically, your statement will have a new balance and monthly minimum payment. This monthly minimum is the least amount of money you will need to pay to ensure your account is kept in good standing. However, if you want to avoid accruing interest, it’s best to pay as much of the owed balance as possible, ideally the full amount. 

If you do not settle the new balance and only pay the minimum amount owed, you will be charged interest on the remaining balance, increasing the total amount you owe.

In the UK, credit cards are covered by the Consumer Credit Act (CCA). As such, there are strict rules that creditors have to adhere to if you cannot pay your bill. 

If you are unable to pay your credit card bill, you will be charged a late payment fee alongside an increased interest rate. Additionally, your credit score will be negatively affected, which will start to compound if you repeatedly miss payments.

Credit cards are a great way to manage your cash flow and (if used properly) boost your credit score. However, if you’re not careful, they can quickly lead into a spiral of credit card debt which can take a long time to pay off.

3 Tips To Pay Off Credit Card Debt

1) Add Up What You Owe and See How Much It Costs

Begin by adding up everything you owe on your credit card. Once you understand the amount of credit card debt, you can identify a starting point for change. This will give you an idea of how much you owe compared to your income.

Now, use your statements or an app to work it all out. If you have multiple credit cards, note down how much you owe on each of them, alongside what you repay each month.

2) Pay Off Your Highest Interest Rate Debts First

If you have multiple credit cards, list your credit card debts in order, from highest to lowest interest rates. This allows you to identify which are costing you the most so you can prioritise paying it off faster.

Paying off your priciest debt is crucial. However, always ensure you keep making the minimum payments on your other debts too. Missing credit card payments can result in damage to your credit score, increased interest rates in future or even penalty fees.  

After you’ve paid off the credit card with the highest interest rate, it’s time to focus on repaying the credit card with the second highest interest rate, and so on. 

3) Set Up a Fixed Monthly Payment Sum

Your monthly minimum is typically between 1-5% of the total amount you owe and represents the smallest amount you can repay on your credit card bill. 

Paying the minimum is an effective way to balance your credit card debt if you’re struggling to pay off more or need cash for a financial emergency. However, if it becomes a regular habit, interest can build up quickly as well. Typically, the longer you take to pay it all off, the more it will cost you overall.

To avoid this scenario, make a fixed payment and pay as much as you can above the minimum amount each month. This will help you pay down your credit card debt more quickly. You may even find it helpful to set up a direct debit for your credit card payment to ensure you never forget or miss one.

Choose Salad Money for Fair and Affordable Loans

If not handled correctly, credit card debt can damage your credit score and easily spiral out of control. To understand and navigate debt, you need careful planning and consideration of all your financial options. 

However, despite our best efforts, there are times where we need a helping hand financially. In these times, Salad Money is here to help.  

At Salad Money, we make affordable credit options available for every employed citizen. As one of the UK’s leading online lenders, we understand that the credit score system isn’t always fair. That’s why, we use an open-banking-based assessment to evaluate the financial situation of every applicant.

With our ‘More Than Your Score’ loans, we provide affordable loan options for every working employee, regardless of their credit score.

To learn more about our services, click here or apply for a loan now!

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