Credit cards can be a valuable tool for managing your money ­– if they’re used sensibly. Unfortunately, they often bring with them the temptation to spend more than you can afford, and a credit card is one of the more expensive ways to borrow cash you don’t have.

Here we look at credit card debt in more detail, including what a credit card is, why people get credit cards, what can happen if you fall into credit card debt, and how to take control of your credit card debt if you find yourself in trouble.

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What is a credit card?

A credit card is a plastic card, similar to the one you get from your bank, that gives you access to ‘credit’ – money that you are borrowing from the bank or credit provider who issued the card, and which you will have to pay back.

You can make purchases with a credit card in much the same way as you would your bank card, but instead of taking money from your bank account, a credit card will make the purchase on credit, which you will repay later.

A credit card is usually issued by a bank or building society, but can also be issued by other credit lenders. All credit cards are protected by the Consumer Credit Act, so there are rules in place that credit card companies have to stick to when they’re marketing credit and setting out their terms to customers.

How do credit cards work?

Credit cards work the same way as loans. Whichever credit card company you take one out with will set you a monthly spend limit that you won’t be able to go over. Within that limit, you can spend however much you want.

At the end of the month you will repay some – or all – of the outstanding balance, depending on the agreement you are able to get. The amount you repay each month depends on your minimum payment. The minimum payment is the amount you have to repay each month in order to avoid fees and charges – if you miss the minimum payment, you can expect to pay extra.

You credit it card will come with an added interest rate, which is applied annually. If, for example, it comes with a 15% interest rate, and you spend £500 over the course of a year, you will actually owe the lender £575 with interest included.

Your arrangement might come with rewards for spending, like air miles, points, or cashback, in order to encourage usage. These benefits can be useful, so long as you manage them carefully.

What happens if you can’t pay your credit card?

With all major credit cards, you will be expected to pay the minimum amount back each month, or you will be considered to have defaulted on payment.

If you start to fall behind with your credit card payments, it’s important to remember that the longer you continue to only pay the minimum, or not make payments at all, the more interest will be added added to your balance. The longer you leave it, the worse things will get.

If your spending is getting out of control, it’s best to rein it and face up to the debt issue as soon as possible. There are several money advice services that can offer you free debt advice and let you know what your options are.

How do you get into credit card debt?

By definition, using a credit card means you’re outspending your earnings. Some credit is good credit, and taking on a manageable level of debt gives you the flexibility to make purchases your income otherwise wouldn’t be able to cover. But it can be a slippery slope.

There can be any number of reasons why people get into serious credit card debt. Some of the most common include:

Taking on too many credit cards at once

While it’s easy to apply for multiple cards and spread large purchases across them, it’s much harder to keep track of what you’re spending with each card, how much your payments are, and when each payment comes off.

Using a credit card to cover unexpected costs

Financial emergencies happen, and for people who don’t have savings that can cover a sudden, unexpected cost, it can be all too easy to put that payment on a credit card. The problem is you still have to repay that debt at some point. The best advice in an emergency is to borrow from another source that doesn’t charge interest.

Being dazzled by credit card rewards

Credit card companies are clever. They know people are attracted to perks, and make sure you get something in return for opening an account with them. Instant cashback might sound like a great idea, but the value of the rewards you get is always less than the value of the interest and charges credit card companies will extract from you.

How much credit card debt does the average person have?

The amount of credit card debt a person has depends on factors like their financial circumstances, how much they usually purchase on credit, and the interest rates and fees attached to the credit provider they choose.

According to the Money Advice Service, nearly 9m people in the UK are over-indebted, and the amount of unpaid credit card debt in the average UK household is £2,688. That may not seem like an outrageous number, but when you consider interest fees and charges, it’s easy to see how payment gets on top of people.

Let’s say you have a credit card debt of £2,000 (well below the national average) and you could afford to repay £100. That might seem reasonable, but when you add in an interest rate of 15% (a very favourable rate), the total amount you owe quickly becomes £2,292. Even by paying £100 per month towards your debt, it would take you nearly two years to pay it off.

The very fact that you are using a credit card means you are accepting a certain level of debt. Serious credit card debts occurs when you take on a level of debt that you are uncomfortable with, or feel that you will be unable to pay off.  Although it’s not one of your priority debts – like mortgage or rent arrears – it’s still important to pay off quickly.

What is the best way to pay off credit card debt?

The best thing to do if you’re struggling with credit payments is to stop using the card straight away and contact your provider to let them know. By informing them that you’re struggling, you may be able to arrange a payment plan before the situation gets out of hand.

If you’re only making the minimum payment, your credit provider will write to you asking to pay more to try and get you out of what’s known as ‘persistent debt’. By setting yourself a realistic budget that you can easily stick to, you’ll be able to pay off your debt faster, without breaking the bank.

Another common tactic is balance transfer. Balance transfers allow you to switch your debt from a credit card with high interest rates to one with lower interest – known as a balance transfer.

Many providers offer a 0% balance transfer credit card for this purpose. A balance transfer card makes it easier to repay your debt by slashing the interest you pay, but you will be expected to pay at least the minimum amount or you might lose the cheap rate.

However you choose to repay, make sure you’re not leaving yourself short of funds for other priority bills such as your council tax or utility bills – the point is to pay back what you can, not to get into trouble elsewhere.

Do credit cards affect your credit rating?

Yes, how much you borrow and how much you pay off your credit card every month will be reflected in your credit score. That’s because your credit card provider will share details of your account activity with credit reference agencies to allow them to update your credit score.

Your credit score allows other lenders to determine your ‘creditworthiness’ and decide how big a risk it is to let you borrow money from them in the future. If you’re struggling with your credit card repayments, you can expect that to be reflected in your credit score. You can check your credit rating by contacting a credit reference agency like Experian.

Failure to settle your credit card balance or make payment will also be noted on your credit report, which displays information such as:

  • How much you owe on your credit card
  • How many payments you’ve made towards your credit card debt
  • Whether you’ve defaulted on a payment
  • Details of your credit limit

Your credit report shows all relevant information related to your finances over the last six years, including any outstanding credit. If you default on payment, the results will be with you long term.

Are there credit cards for people with bad credit?

If you have a low credit score, or little to no credit history, you might come across a credit card that lenders say will help you build up your credit score.

In certain scenarios, these cards can be useful. People who would be unlikely to get credit elsewhere can get access a credit card, and a series of careful purchases and repayments can help those with poor credit ratings slowly rebuild their score.

It’s important to note, however, that these kinds of cards come with notoriously high interest rates – often 30% or higher (in other words, more than double the interest of a regular card). They still charge less interest than certain types of credit, like payday loans, but you should consider your options carefully before signing up for one.

If you have a good credit rating, you should stick to mainstream credit cards. If you have a poor rating, however, and need access to credit in order to make ends meet, a credit builder card might be worth thinking about – but you should always seek money advice before going ahead.

Is it possible to renegotiate credit card debt?

If you’re struggling to keep on top of your payments, it’s important to contact the credit card company, explain what’s going on, and let them know how much you can afford to pay.

The credit card provider might be willing to come to an agreement with you to pay an affordable amount, even if it’s only for a short time until you can get back on your feet.

In some cases, you may be able to agree to a final settlement to pay a portion of the debt that’s less than the total balance – if you have the funds to be able to do this and can make the payment quickly.

Is it a bad idea to settle credit card debt?

People struggling with credit card debts may agree to ‘settle’ those debts. Settling means coming to an arrangement with the provider that will see them accept a fee that is less than the total amount of debt owed.

A lender usually only agrees to settle a debt if it becomes clear that the person who owes them money will not be able to pay them back in full. Settling can be beneficial for the credit card borrower and the lender – the lender gets a portion of what they’re owed, and the credit card borrower saves money on the total debt they owe.

While there are some benefits to settling your credit card debt, it’s always best to pay them off in full if you can – even if it’s going to take longer than you’d like.

Even though settling means you’ve come to an arrangement with your lender, official documents like your credit file will still show that you failed to pay back everything you owe, making it harder for you to borrow in the future.

Can I get sent to prison for credit card debt?

This is a common question, and something many people worry about. The reality is, the likelihood of being sent to prison for unpaid debt is extremely low.

You can only be sent to prison for debts like criminal fines or government debts, and even in these situations, it’s often the last resort.

If you’ve been threatened with prison for failing to repay your credit, you have every right to complain, or seek legal advice, as the credit card provider doesn’t have the power to enforce this.

What happens when you have joint credit card debt?

It’s not possible to have a joint credit card, as the law dictates that the account can only be in one person’s name. However, it is possible for the company to allow a second card to be used by someone else, such as your partner.

Even if you do have a second card, however, there won’t be two credit card borrowers. It will still be you that’s responsible for paying back the balance spent on both cards. The other cardholder holds no liability, even if their name is on it.

Because of this, the best advice is to think very carefully about naming a second cardholder on your account, and to avoid doing so if you can.

How do I get help with my credit card debt?

Millions of people across the UK use credit cards as a means of supplementing their income, and it’s all too easy to for credit card borrowers to get into debt. If you’re struggling to pay off credit card bills, don’t let the money, fees, and interest mount up. Take action with free debt advice.

IVA plan has helped thousands of people in the UK start their journey to debt free. Our expert advisers are trained to deal with people in financial difficulty, offer them impartial debt advice, and help them come up with a repayment plan that works for them.

To get free, confidential debt advice, or arrange a debt management plan, contact us on 0808 253 2559. As soon as you get in touch, we will get to work on fixing your finances and ensuring your long term financial future.