Fergus Muirhead looks at losing control of credit card spending
I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.
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In this week before Christmas I've decided to concentrate on one letter to highlight the dangers of letting your credit card spending get out of control, to show you how to avoid that happening in the first place, and to give you a few hints if you find that things are getting on top of you and you can't keep up with repayments.
Q. My wife has a credit card and she has to make a minimum payment which this is what she can afford. The interest is so high that her balance is not going down. The card has not been used since 2005. Her balance in 2007 was £4233.22 and the balance in August 2012 is £3419.93. They asked her for a minimum payment of £90 and took £88.40 interest and £1.60 off her account. Since 2007 to 2012 they have only taken £814.19, which means they have taken £3,419.03 in interest. We have written to the bank about this and they say they disagree that their interest is high. What do you think?
Ronald Stevenson (name changed)
A. Your letter highlights all that is wrong with credit cards if they are not used properly, and I don't mean that in any way as a statement about the reason why you used the card, or built up the level of debt you did. It's so easy to do, and so easy to get out of once the debt has built up because, as you have highlighted, the interest that accumulates on the card very quickly means that the vast majority of your monthly payment, especially if you only make a minimum payment each month, goes towards interest payments and not to a reduction in the balance outstanding on the account. In your example, of a £90 payment only £1.60 was used to reduce the balance on the account, and the other £88.40 was interest. It's very easy to get into a mind-set with credit cards where you see the amount of money you owe in terms of your minimum monthly payment instead of the actual outstanding balance, and you get into the way of budgeting for that amount rather than focusing on repaying the amount that you actually owe. Of course it's not helped when credit card companies are still charging such high rates of interest on their cards. Given that bank base rates have been so low now for so long it's verging on the criminal that banks haven't responded by reducing the rates of interest they charge on their cards.
But they haven't and your question asked what I thought. I would go to your bank and explain the position you are in and you are trying your best to repay the outstanding balance but that you're not getting anywhere because the vast majority of the payments you make go towards a repayment of interest rather than capital. I would explain that you want to reduce the balance outstanding on the account but that you can't because the payments that you can afford to make are only dealing with the interest. I would ask the bank to consider a freeze on interest payments so that you can reduce the capital outstanding. They may then want to send you an income and expenditure statement of some sort so that they can assess how much you are likely to be able to afford on a regular basis. And you would need to make sure that you stuck to any agreement that they made with you so don't agree to anything unless you think you will be able to maintain payments over a fairly lengthy period of time to help you get the outstanding debt reduced.
For others reading this the lessons should be obvious. Credit cards are a great way to buy, and can also be a great way to spread the cost of buying, as long as you keep a close watch on what you're doing. Your debt is not your monthly repayment; it is the total amount you have spent on your card along with any interest. And interest can add quickly to the account if all you do is make the minimum payments each month. Resist the temptation to keep spending right up to your credit limit just because it is there, and resist the temptation to accept every increase in your credit limit that you are offered.
Remember that interest-free credit cards are still out there and so if you do build up a level of debt that you can't pay off immediately then it might make sense to transfer your balance to on interest-free card, but remember that there may be a charge for doing this, often 2% or 3% of the amount that you are transferring. So make sure that the sums add up before you agree to this type of transfer.
If you do find that you have a balance outstanding on your card and you can't afford to continue making payments - and this can happen for a variety of reasons often beyond your control such as illness or loss of income - then it is really important to speak to your credit card company as soon as the problem arises. It's very easy to sweep these things under the carpet - payment dates come and go and bills remain unopened - but please don't do that. Pick up the phone to the credit card company and explain the situation. They will be in a much better position to help you if you let them know there could be a problem and they catch it early.
Hopefully it won't come to that - use your card sensibly and it can be a really useful way to shop. Pick the card with the lowest interest rate you can find and check out the interest-free period - the number of days you have from the date of purchase to clear your balance before interest is added. Choose the card with the longest number of days. And don't take it out with you to your Christmas lunch!