Credit cards and debt
If you are 18 or older, avoid building up big credit card debt. Overdue balances can attract high charges. Debt can grow quickly.
Avoiding the credit card debt trap
Credit cards are a popular way of borrowing money because you can repay the amount you borrow in smaller amounts over a long period of time. However, some people fall into the habit of using credit cards to pay for everyday things.
If you do this, your monthly payments will start to add up and you might run the risk of falling into debt that can often reach into thousands.
If you're going to take out a credit card, plan to repay what you owe in full at the end of each month.
If you don't pay off the full amount every month on a credit card, you'll be charged interest on the whole lot - not just the unpaid amount. The rate you pay will vary depending on what the annual percentage rate (APR) of the credit card is.
Annual percentage rate (APR)
All credit card companies have to quote an APR. This helps you compare products. It takes into account the total cost of borrowing, including:
- the total amount of interest you'll pay
- any additional charges, for example, a monthly fee for taking out the card
- when and how often you must pay the interest
The APR doesn't take into account charges you might have to pay, like a charge for missing your monthly repayment.
The interest rate of any credit card should be clearly displayed on any application form and promotional material. So make sure you know how much you'll be charged if you're not going to pay your balance off in full.
Balance transfers to reduce credit debt
Many credit card companies offer zero per cent interest rates as an incentive to move your unpaid credit card balance to their credit card.
If you have a large balance on your credit card and are struggling with high interest payments, balance transfers can be a useful way of making a small dent in your debt. Remember though, it can't solve overall debt problems.
The interest-free period only lasts for a certain amount of time - usually six to nine months. If you have money left on your account after this date, you'll be charged interest as normal.
If you are transferring a balance, you should always read the small print on the application form. Although your unpaid balance may not be charged interest during the introductory period, interest on any new purchases that you make will quickly add up.
If you do want to do a balance transfer, it's a good idea not to make any purchases with your new card. This way you'll be able to make the most of the zero per cent offer.
Transfer fees
Some credit card companies also charge a balance transfer fee to take over your unpaid debt. This can be charged as a flat fee or it may depend on the amount that you are transferring.
If you are planning to transfer your existing balance to another card, make sure you know whether you'll be charged for doing so.
Store cards and debt
Most department stores have cards you can use to pay for goods over a period of time. They work in the same way as credit cards but often charge higher rates of interest and can only be used to pay for goods from that chain of shops.
Store cards usually offer a discount or a gift on the first time you use it to persuade you to apply for one. Remember that unless you plan on paying off the full balance straight away, they can often work out to be twice as expensive as credit cards.
Credit card alternatives
The best way to avoid credit card debt is to plan your budget and try not to spend more than you earn.
When you do have spare cash, look at ways of making it work better for you. For example, tax-free savings accounts.