The most popular form of borrowing with the masses appears to be credit cards, with the UK seeing an 11.6% increase in credit card borrowing in April according to the Bank of England (BoE). It is the highest the bank has seen since November 2005. As the Bank of England raised interest rates to 1.25%, Britons are facing additional pressure on their finances. Sabya Mukherjee, head of credit risk at money app Monese, explained two different ways a person can pay off credit card debt.
Mr Mukherjee explained that if a consumer has a credit card balance of £2,500 at 19.9% of the annual percentage rate of charge (APR), the total amount needed to pay off the balance would be £2,877.41.
This is an additional £377.41 on top of the original amount due.
Mr. Mukherjee’s first suggestion is to take out a loan at a lower interest rate to pay off the credit card.
He said: “A £2,500 loan at 9.9% interest for 18 months would cost you £2,691.75, just £191.75 more than the original credit card balance. .”
This is a reduction of £185.66 from the initial extra cost of £377.41 on the first card.
He added: “However, it is very important to keep in mind that missing payments on a loan could significantly increase overall borrowing costs.”
The second option Mukherjee recommends for people in credit card debt is to use a balance transfer credit card for 18 months.
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He said: “Assuming a typical transfer fee of 2%, it will cost you £50 over 18 months instead of the original £377.41.
“However, as with lending, discipline is essential with this type of credit card offer. If you miss repayments or don’t repay the full amount within the balance transfer window, your costs could add up quickly. »
Mr Mukherjee said that “it is important” that people fully understand the repayment commitments they are making and the terms of late payment.
He continued, “To qualify for a balance transfer credit card or loan, a customer should have a good credit history and a good credit rating.
“For balance transfer credit cards in particular, if you’re in the higher score ranges, you might even be eligible for balance transfers with no transfer fees. However, these are more difficult to obtain.
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Mr Mukherjee explained that all credit card users should be and remain “knowledgeable about credit cards” and that people should know their score and keep “a close eye on any changes”.
He said: “Think of it as your financial resume, see where you can save money by consolidating your ongoing commitments, and review deals you’re pre-approved on, usually done through soft checks.”
‘” If you are trying to reduce the amount you owe, use your credit report to make a list of all your accounts, then go online or check recent statements to determine how much you owe on each account and the rate of payment. ‘interest they charge. you.’
If a person’s credit score is low, they can rebuild it by managing their credit and paying on time. Over time, this will increase a person’s score, but it won’t happen overnight.
Mr Muckerjee also recommended people consider using a credit product, saying people “definitely don’t need to take out an expensive credit card” to build their score.
He said: “Your credit history and your score are extremely important. Landlords, utility companies, and cell phone providers use your credit score and history to make decisions about tenants and customers.
“If your score is low, these things become more expensive or even inaccessible.”
According to data from the Bank of England, UK consumers invested more than £3bn on their credit cards between January and April, and a further £1.6bn on other forms of credit.
Britons borrowed an additional £1.4bn in consumer credit in April, up from £1.3bn in March.
That figure was split evenly between £700m on credit cards and £700m on other forms of credit such as car finance and personal loans.