How to manage your credit card debt after Christmas

With just days left until the new year, now is the perfect time to start making financial plans for 2021 and for many, one major goal will be to clear their post-Christmas credit card debt.

Clearing credit card debt can be one of the most fulfilling financial goals to achieve, especially as once it’s been repaid it can often free up a significant amount of money each month that can be put into savings instead.

As well as this, credit card repayments may start to get more expensive as the Financial Conduct Authority (FCA) has encouraged lenders to help customers who hold persistent credit card debt to clear their outstanding balances. For example, Barclaycard customers are set to see their minimum credit card payments increase in January, which for some could see their repayments more than double. Earlier in the year, Halifax, Lloyds Bank, MBNA Limited and Bank of Scotland all increased their minimum monthly repayments.

According to debt charity The Money Charity, the average credit card debt per household in October stood at £2,177. While this may not seem like a high debt, on a credit card with a 21.95% APR and paying a monthly repayment of £77, it would take the borrower three years and three months to clear the debt, which will have cost them £791.73 in interest.

But transferring the debt to a 0% balance transfer credit card will not only make the debt quicker to repay but the actual cost of the debt will be lower.

For example, if the borrower transferred this debt to TSB’s Platinum Balance Transfer Card Mastercard, which has the longest interest-free term of 29 months, and made £77 monthly repayments, the credit card debt (including the 2.95% transfer fee) would be repaid in two years and five months. The total cost of the debt would be just £64.

Although it clearly makes financial sense to move credit card debt to a 0% balance transfer credit card, those considering this option have to be disciplined to ensure that they do not fall further into credit card debt. Having a repayment plan to ensure the full balance is paid off before the interest-free period ends, as well as not spending money on the credit card until it is repaid, will help to avoid falling into further debt.

For those with a higher amount of credit card debt, or who have debts across multiple credit cards, consolidating the debt into a personal loan may be a good option.

For example, a borrower with one credit card debt of £5,000 at 21.95% APR making monthly repayments of £146.17 would take four years and three months to clear the debt. The total cost of the debt would be £2,467.57.

The lowest personal loan APR in the chart today comes from Tesco Bank, which charges 3.40% on loans of £5,000. This loan, with repayments of £146.17 would take three years to clear. The total cost of the debt would be £262.12.

Personal loans usually only offer loans for amounts of £20,000 or lower, which means that those with debts over this amount may have to look for an alternative option. In this situation, one option available is a secured loan.

A secured loan usually allows borrowers to take out a significant loan, but in exchange the borrower has to put up an asset, usually their home, as security against the loan. This means that although a secured loan can reduce the interest being paid on large debts, it is a risky borrowing option that could see the borrower lose their home if they do not keep up to date with repayments.

2020 has been a financially difficult year for many and has resulted in more consumers struggling to manage their credit card debt. For those who are unable to keep up with their credit card repayments, it is important to seek help and support as soon as possible for organisations such as citizens advice or free debt charities.

Those who are struggling with credit card repayments and who have been financially impacted by the Covid-19 pandemic can still apply for a repayment holiday and they should contact their bank to make an application.