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As a society, we are borrowing more and more – and there is no let up in sight.
Last year, the Bank of England announced that consumer debt (credit cards, loans and mortgages) had broken the trillion pound barrier for the first time. That’s right – a trillion pounds - £1,000 billion. And did you know that there are now more credit cards in the UK than there are people? Yep – 67 million cards were in circulation last year.
Just as with any other aspect of your finances, it’s important to make sure that you are getting a good deal with your credit card or, more likely, cards. The best card for you will depend on the kind of borrower you are.
If you are very disciplined and always pay off your balance in full each month, you should look for a card with a good interest-free period and possibly perks like air miles or cashback. If, however, you usually pay off only part of your balance each month, you need a card with a low interest rate. And if you have built up a substantial debt on another card, you should think about transferring it to a card that offers a 0% introductory rate on balance transfers – although do check to make sure that, after the introductory period, the ongoing interest rate is competitive.
Once you get the new card, remember to cut up the old one, or you’ll just build up the debt again.
When you’re out shopping in the High Street, it’s very easy to be tempted by store cards. You go up to the till and they offer you introductory discounts to open an account on the spot. It’s very tempting but, for most people, not a good idea. The interest rates charged by most store cards are exorbitant – APRs of up to 30% are common.
There are one or two exceptions – John Lewis and M&S, for example, do charge competitive rates. If you are absolutely certain that you will pay off the debt before the interest-free period ends, there is no harm in taking advantage of the discounts, magazines, special preview evenings and other perks. But if you are not confident that you can pay all the debt by then, it is best to leave store cards well alone.
At this time of year, you may also be tempted by affinity cards. These are just normal credit cards but they are linked to charities. The more you spend, the more is donated to the good cause. What could be wrong with that? Well, the fact is that they usually have very uncompetitive interest rates. So, if you don’t usually pay your balance in full, it would make better financial sense to get a card with a lower interest rate and make a contribution to the charity from the money you’ve saved on interest!
On the subject of giving to a charity, much in the news as a result of the shocking events in the Indian Ocean, you can donate even more to your chosen charity by ticking the gift aid box. This will mean that the charity concerned can get an additional 28% added to your gift from the Inland Revenue.
If you are a higher rate tax payer, you will benefit by being able to claim higher rate relief which you can either keep or use to make additional charitable donations. Beware though; you shouldn’t tick the gift aid box if you aren’t at least a basic rate taxpayer.
If you are in debt and can see no way to pay it off, you should talk to an expert.
The Consumer Credit Counselling Service (0800 1381111) can help you draw up a budget and negotiate with your creditors. Or you could contact the National Debtline (0808 8084000) or your local Citizens Advice Bureau for free advice.
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