THE Bank of England last week raised interest rates to 1.75%, the biggest rise in 27 years – but what does that mean for your credit card debt?
Millions of people struggling with the cost of living crisis may be tempted to take on more debt to cover the cost of essentials – but it’s important to understand how rising rates could affect you.
Generally, credit card interest rates are variable, meaning they go up and down – but they are usually not tied to the base rate set by the Bank of England.
However, credit card rates have been rising over the past few months and may well rise as interest rates rise.
This means you could end up paying more if the interest on your card goes up.
The ideal way to use a credit card is to pay the balance in full each month, because that way you don’t start paying interest – but that’s not always possible.
But Francesca from the budgeting and debt blog The silver fox said getting a handle on your credit cards now could help you figure out where you could save money.
Here are his top tips for managing your credit card:
Know where you are
First, you need to make a list of all your debts and understand the interest rate you are paying – are the rates fixed or variable?
“It’s important to know where you are right now so you can figure out if there’s action you need to take,” Francesca said.
This exercise doesn’t have to be complicated – take all the cards out of your purse and write on a piece of paper how much you owe on each, what the interest rate is, and when that rate expires.
Then you’ll know what you’re dealing with, even if it seems overwhelming at first.
Consider Balance Transfer
If you have a credit card with a high interest rate, it may be worth seeing if you can transfer the debt to another card with a better rate.
A 0% Balance Transfer Agreement means you pay no interest on money you owe for a set period of time.
This will help you pay off your debt faster because any repayments you make will reduce the amount of debt, rather than just paying off the interest.
But these cards sometimes charge a fee to move your debt, so you need to read the fine print.
“Check the conditions on these maps before you start,” Francesca said.
She recommended using MoneySavingExpert’s online tool to check if you are eligible for a card before applying as well.
Currently, NatWest, Sainsbury’s Bank and Santander all offer a 0% balance transfer card free of charge, allowing you to hold your debt on that card for 21 or 22 months, depending on which provider you choose.
Choose what you pay
If you can afford it, it’s worth trying to clear some of your credit card debt so you don’t get hit with higher interest rates if your provider chooses to raise them.
It’s worth figuring out which debt to pay off first, but it depends on your situation and the different offers you have on different cards.
“You might want to go for the higher interest rate to save money by paying more interest, or you want to go for the lower debt to make it disappear,” Francesca said.
Even if you can’t afford to pay the full amount, repay more than the minimum payments each month if you can afford it.
This lowers your overall cost because you won’t be paying interest on the debt for as many months.
Establishing a budget for your overall expenses is the best way to determine how much you can afford.
Consolidate your debt
Credit card debt consolidation consists of consolidating your existing debts onto a single credit card.
This can help simplify your repayments and make your debts more manageable because you only have one monthly payment to make.
But there could be a one-time transfer fee to transfer the debt to a balance transfer card, and you could face a high interest rate after the low or 0% introductory period ends.
Be warned – if you miss refunds, you could be hit with penalties or lose the 0% offer, which means you could end up in a worse position than you started out in the end.
And interest rates could be high if you use the card for new expenses.
“You can consider consolidation, but there are pros and cons.
“Be sure to do your research and seek advice,” Francesca said.
Ask for help
Francesca said hiding your head in the sand about credit card debt won’t help you, even though dealing with the problem is scary.
This is really important if you’re struggling to pay the minimum amount on your credit cards that you tell your lender because they’ll probably be able to help you out.
Francesca said: “Talk to your lenders and explain your situation.
“See if they are willing to freeze your interest or reduce it.”
Providers should work with you to offer an affordable payment plan if you’re struggling to get your debts under control.
You can also use the Breathing Space program – it saves you from paying interest or penalties for 60 days to help you get back on track.