Credit Card debt is one of the most popular types of consumer credit debt in the UK, and now accounts for significant amounts of the total levels of unsecured debt in the UK.
Credit Cards have many advantages and can be useful for people when they are travelling, buying online or wanting to place a deposit down on an item.
- They are widely accepted
- Can provide a safe method of making payments online; and
- Offer consumers with some security, should a item or service they purchase not meet their expectations, or be delivered.
How do they Work?
The basic idea of a credit card is you purchase items or services with the card, and the credit card company pays for them.
This is important, as what it actually means from a legal perspective is the Credit Card firm is buying the item. The easiest way to think about it, is there are three parties to any agreement: You as the purchaser, the vendor as the person selling you the service or goods, and finally the credit card company, who acts a middle man and provides the finance.
In return for this you obtain and own the item, and agree to repay the debt to the Credit Card Company. Normally you do this each month by making at least the minimum payment. The minimum payment is normally a set percentage of the balance owed each month, or a fixed amount, whichever is the highest. So it may be the minimum payment is 5% or £25, whichever is the higher.
The problem, however, is the minimum payment rarely reduces the balance by that much and just covers the cost of the credit, which is the interest that the firm charges each month. This means if you just make the minimum payments, it will take you a long time to repay the debt, and if you keep spending, your level of debt will continue to increase.
It is always wiser to try and clear the full amount you owe each month, or at least try making payments that are more than the required Minimum Payments.
When you take a Credit Card out, you will be provided a credit limit by your Credit Card Provider. This is the total amount you have to spend, or borrow.
Lenders should also ask you when you take out the card whether, in future, if you qualify for an increased credit limit, whether you want them to just apply it or whether you want them to ask you first.
The danger of an increased credit limit is it makes it easier for you to keep borrowing and getting further into debt.
However, having an increased credit limit, providing you don’t use it, can be useful as utilising less than 50% of your total credit limit can be good for your credit rating.
Section 75 Protection
As mentioned, however, Credit Cards do have some advantages for consumers.
For example, under section 75 of the Consumer Credit Act 1974, if you spend between £100 and £30,000 on a transaction, the Credit Card Firm is jointly and severally liable with the retailer or service provider for any faulty goods or services you receive.
This mean if you spend within those amounts and you don’t receive an item or it is faulty, you can claim a refund from your Credit Card firm. They will then seek a refund from the retailer or service provider. This can be useful when buying things online, by telephone, or paying deposits when making reservations.
Interest and Charges
One of the main factors you need to pay attention to when you using a credit card is the interest and charges that the Credit Card Firm charges. These can be quite high in some cases and will depend on the provider.
Equally, however, interest and charges may vary depending on the type of purchases you make and may even have interest free periods.
Credit Cards also usually offer cash advances, where you can withdraw money, like you can with a debit card from an ATM machine. However, you need to be careful, as this can be easy to do, and credit card firms will usually charge a higher rate of interest on these transactions.
It is important when you have a Credit Card to check your monthly balance statements, as these will show what amounts you have borrowed and what interest is being charged on those amounts.
When you make a payment to your credit card, the card provider should allocate your payments first to those amounts with the highest levels of interest; and then in descending order, to the amounts with lower levels of interest.
Another feature of Credit Cards is you can use them to carry out Balance Transfers, which is when you transfer one credit card balance to another, usually as the Credit Card you are transferring to, is offering a lower rate of interest or an interest free period. This can be a useful tool to reduce the cost of credit and help you pay down debt.
However, although many credit cards will offer an interest free period when you are making a credit card balance transfer, they will charge an arrangement fee, which will be a percentage of the balance you are transferring.
It is worthwhile making sure this won’t be more than you will pay in interest, if you just pay off the debt.
Another feature, which is similar to a Balance Transfer, is a money transfer.
What makes this different is the Credit Car Firm will offer to pay money into a bank account, again for a period during which they wont charge interest.
This can be an easy and cheap way to borrow money, and can be used to pay off other debts, such as overdrafts that cannot be paid off using a Balance Transfer.
Again Firms will normally charge an arrangement fee, which is a percentage of the money borrowed. After the agreed interest free period the Firm will begin charging interest again.
Persistent Credit Card Debt
A major problem with credit cards, has become what is known as Persistent Credit Card debt, which is when people become effectively trapped in credit card debt and never pay much more than the interest on their balance each month, meaning the debt doesn’t go down; or if it does only by a small amount each month.
Persistent Credit Card debt is when you pay more in interest and charges over an 18 month period than you do in reducing the balance of the debt you owe.
When you are in Persistent Credit Card debt, your lender will write to you at month 18 and advise you that you are in Persistent Credit Card debt and that you need to pay more to reduce your balance.
At month 27, if you remain in Persistent Credit Card debt, your lender again should write to you again to remind you that you need to pay more to reduce your balance.
At month 36, if you remain in Persistent Credit Card debt, your lender should contact you, but also take action to help you. This may include:
- freezing interest
- offering you a repayment plan to pay off the debt within 3 or 4 years.
- reducing your credit limit
- suspending your card
What if you cannot Pay?
If you cannot pay your credit card debt, then as a Consumer Credit Agreement, once you miss any payments or are late in making a payment, your lender will report this to Credit Reference Agencies and this may affect your ability to obtain credit in future.
After you have missed the equivalent of two months payments, they must also legally serve on you a Notice of Arrears and may also serve on you a Default Notice, before demanding the full amount owed be paid.
They are then likely to pass the debt to their own collections department or an external debt collection agency. They may also sell the balance onto a debt purchasing firm.
Ultimately, a Court Action may be raised to enforce payment of the debt.