On 1 March 2018, the Bank of England released data that credit card lending (seasonally adjusted) to individuals rose to £70.35 billion in January 2018 from £70.276 billion in December 2017, a rise of 0.1% for the month.
In the face of rising credit card levels, it helps to know how to keep interest charges to a minimum. Here are our top 4 tips.
1. Follow the Rules
If purchases were made on a 0% interest card, be absolutely sure to pay on time every month, pay at least the minimum amount due and stay within your credit limit. Failure to do so usually means the 0% promotional period is brought to an early end – and you’ll start incurring interest charges at your card’s standard interest rate (typically 18.9% or more) going forward. (The same also applies to balance transfers on 0% credit cards.)
2. Pay as Much as You Can
Whatever the interest rate, make your monthly payments as large as possible. Paying at least the minimum amount due is certainly critical to keep promotional periods and avoid charges and being reported to the credit agencies. However, those paying only the minimum amount each month will typically pay interest charges amounting to 1.5X to 3X their original debt (depending largely on the interest rate and the minimum payment floor), as you can see in the following chart.
Most people aren't aware of the minimum payment floor on their credit card, but it's really important—especially if you only pay the minimum each month. The "floor" is the absolute minimum you'll pay each month. It comes into effect towards the end of debt repayment, when your balance is lower. Once your amount due according to usual minimum calculations falls below the "floor", it kicks in.
Basically, a higher floor means you'll pay back the remaining balance sooner (more towards the debt/less towards interest); a lower floor means a longer time to pay back your debt and more interest charges along the way. For more information on the impact of the minimum payment floor, you can read our article on how a low floor can cost cardholders hundreds of pounds.
By making monthly payments larger than the minimum amount due, cardholders can pay much less in interest charges over time. Why? The extra you pay each month goes wholly to reduce your debt (not towards interest), enabling you to reduce the outstanding debt sooner.
3. Pay Off Debt within Promotional Periods
In fact, those with a 0% card should try to pay back their full balances before the 0% promotional period ends, thereby eliminating interest charges altogether.
4. Switch to a Balance Transfer card
Those with an interest-bearing card may have the possibility of moving the balance to a 0% balance transfer card. Remember, a new credit card application will leave a mark on credit record. And be sure to follow the advice from Top Tip 1!