What is Credit Card Debt?

If you have a credit card, you are borrowing money every time you use it. However, you may not be building up credit card debt. It all depends on when and how you pay your bills.

Read on to find out more.

What is credit card debt?

When you use a credit card you are borrowing money from your provider. When you get your monthly credit card bill, it will show you what you have spent on the card and how much, in total, you currently owe. That is your credit card debt.

If you repay your credit card bill in full every month you won’t build up debt and shouldn’t pay interest on the amount you have borrowed. There are some exceptions to this, including if you made a cash withdrawal using your credit card, for example – these tend to incur interest from the moment the cash is in your hand.

Credit card debt can become expensive if you don’t repay what you borrow in full each month. This is when you are likely to start having interest added to your bill. This can make your debt grow quite quickly as credit card interest rates tend to be high.

» MORE: How to read your credit card statements

How does credit card debt compare to other forms of debt?

When you are thinking about borrowing money you have a number of options. You could take out a personal loan, use an overdraft facility on your current account, or use a credit card. Which option is best will depend on your personal circumstances.

If you only need money for a short period of time – for less than a month, for example – a credit card may be a good choice as it is likely to be interest free, as long as you repay the debt in full before interest is charged.

Equally, if you take out an interest-free purchase credit card or interest-free balance transfer credit card, you may be able to borrow for longer periods without paying a penny.

However, if you end up accruing interest on a credit card, it can quickly work out to be more expensive than other forms of debt. This is because interest rates on credit cards can be quite high.

For example, the average interest rate on a credit card is around 18% according to the Bank of England. In contrast, the average three-year personal loan has a 7% interest rate, according to MoneyFacts.

A positive for credit card debt compared to a personal loan is that you have flexibility when it comes to making repayments. As long as you cover the minimum repayment, it is up to you how much you pay off your credit card each month. You have the freedom to take your time or pay it off in one go, depending on your situation.

In contrast, a personal loan has set monthly repayments which you must pay. If you repay the loan early there may be a charge to pay.

» MORE: Loan, overdraft or credit card? Which is right for me?

What are the consequences of building up credit card debt?

If you build up credit card debt and it accrues interest, then what you owe can grow quite quickly. If you then start to fall behind on your repayments it can have a negative effect on your credit score, which can in turn make it harder for you to borrow in the future.

» MORE: What is a good credit score?

How can I reduce my credit card debt?

There are plenty of ways you can tackle credit card debt. The first step is to minimise the interest you are paying on it.

One way to reduce interest is to move your credit card balance onto a specialist balance transfer credit card that offers an introductory interest-free period. This could give you months, or even years, to chip away at your debt without it growing any further.

You can also look at how you repay your credit card. Opting for a fixed amount each month rather than simply paying the minimum repayment can reduce the time it will take for you to be debt free.

The more you pay off each month, the less you will pay overall.

» MORE: How to pay off your credit card

What happens to credit card debt if I die?

If the debts are in your name only, outstanding credit card balances will be paid out of any money left in your estate. This includes money raised from selling your assets. If there isn’t enough money in your estate to pay off the debts, they are written off.

Is my spouse responsible for my credit card debt?

Your spouse isn’t responsible for repaying your credit card debt. Only the person whose name is on the account has to worry about repayments.

However, if you are financially connected on your credit reports – for example, if you have a joint financial account, such as a mortgage – your credit card debt can affect your partner’s credit score too.

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