Sara Williams, creator of money advice blog Debt Camel, and local Citizens Advice volunteer advisor, guest blogs for The Money Charity on the best ways to pay off credit card debt quickly.
The Financial Conduct Authority last week announced its new rules on how to tackle persistent credit card debt for people paying more in interest than they have repaid from what they borrowed for 18 months or more.
The minimum payment trap
Because the minimum payments on a card are so low, and because they drop as your balance drops, millions of people are caught in the “minimum payment trap”.
If you borrow £3,000 on a card with a 19% interest and the minimum payment starts at £74, it will take 27 years to clear the card debt, paying a total of £4,192 in interest. But if you had made that same £74 payment every month, the balance would be zero after 5 years, and you would only pay £1,576 in interest.
Some people can’t afford to pay more than the minimum, and people in even deeper trouble may still be putting everyday expenses on their credit card. They should be helped by the new FCA rules.
But there are a lot of people who could get out of this minimum payment trap, clear their debt faster and pay a lot less interest.
It would be ideal if credit card companies offered everyone a wider choice of monthly repayment options, perhaps one that is 50% more than the minimum, or one where your payments don’t decrease as the balance drops.
The FCA isn’t suggesting this though. So what are your options now if you want to pay off your credit card faster? Here are some practical suggestions.
0% balance transfers
This has to be first because it dramatically reduces the cost of borrowing as all your repayment is clearing debt. But it’s only going to work if you have a good credit score and lenders don’t think you have already borrowed too much. If you can’t get a good offer now, don’t give up on this one totally, as a period of using some of the other options may improve your credit score enough to get a 0% deal.
If you get one, take full advantage of it by paying more than the minimum payment and never spending on the new card. Whilst many of these offers have some sort of fee included, they may still be a good option.
Fix your card repayments
This only works if you aren’t spending on the card!
The credit cards don’t offer this option, but it’s easy to set up. Most firms allow you to set up a fixed payment of your own choosing. So you can set up a standing order to the credit card for the current minimum payment – £74 in the above example. Or even better, round it up a bit… £80 really will cut the interest you pay and clear the card quicker.
Pay the minimum PLUS
Here you sign up to paying the minimum on the card each month but aim to make other manual payments to it as well.
If you know you can pay a fixed amount extra a month, the best way is to set up a standing order to the card on the date you get paid – then the money is never in your account to accidentally spend. Even £10 or £20 will get you out of the worst of the minimum payment trap!
If you would love to do this but can’t be sure how much you can afford each month, or you aren’t good at saving money, consider looking at these three approaches:
- Put away any economies – if you “save” money by deciding not to buy something, move the money into a new savings account with your bank the same day.
- Skim your bank account – check your bank account most days and “skim it” by rounding down the amount. So if you have £176.47 you can move 47p into your savings account. Or £1.47, or £6.67 if you think the month is going well and you can afford more.
- Use a “stealth savings app” – There are some apps that quietly take money they work out you won’t need and save it for you. Many people whose money just sort of vanishes find they can actually save without realising it using these apps.
With any of these three options, you then pay over what you have saved to your credit card at the end of the month.
About Debt Camel:
Sara Williams set up Debt Camel in 2013 as a website to give out free general debt advice, using her experience as a volunteer advisor at her local Citizens Advice and as a professional debt advisor. Now an affiliated member of the Money Advice Liaison Group, and winner of the UK Money Blogger of the Year award in 2017, Sara’s free tips and advice has helped many people deal with their indebtedness.
About The Money Charity:
The Money Charity is the UK’s financial capability charity. We believe that being on top of your money means you are more in control of your life, your finances and your debts, reducing stress and hardship. Also, being on top of your money increases your wellbeing, helps you achieve your goals and live a happier more positive life as a result. Read more about The Money Charity here.