Bank of England data shows credit card borrowing is at its highest level since 2004, off the back of Christmas, rising energy costs and higher food bills.
With households expected to continue feeling the squeeze this year, it’s likely that people will increasingly turn to credit to manage their expenses.
If you are concerned about credit card debt, follow our guide below to potentially save hundreds of pounds in interest.
The benefits of using a credit card
Credit cards can be an effective short-term funding solution because they allow you to make purchases that you pay back at a later date.
It is a flexible form of borrowing because you are given a credit limit – say £1,000 – and this is a revolving facility. So if you spend £500 and repay the money, you can then borrow £1,000 again.
You have to make minimum repayments to your card provider each month, which is typically 1-2 per cent of your balance. And if you repay in full at the end of every month, you will not pay interest.
But if you can’t afford to make the full monthly payments, or want to spread the repayments over time, you will be charged interest (unless you have taken out a 0 per cent purchase credit card deal). The average annual interest charged by credit card providers is around 30 per cent.
As well as giving you the option to borrow money, there are other benefits to a credit card.
These include:
■ The opportunity to boost your credit score (as long as you make regular repayments).
■ If you have a low credit rating, a credit builder credit card can increase your score quicker.
■ Providers including Santander and American Express offer cashback
on purchases.
■ Providers including Sainsbury’s and American Express allow you to earn points for money off your shopping or exchanged for airmiles.
■ Greater protection than debit cards: If purchases are faulty or fraudulent, you have a better chance of getting your money back.
‘I was bankrupt, but now I have ten credit cards’
Mark Wilkinson, a lifestyle coach from Surrey, went bankrupt in 2009 and has since has worked hard to improve his credit rating and attitude to money. Mark, who runs his own business and owns multiple investment properties, uses a credit builder credit card on a regular basis and has done for the past 12 years.
The card has a £500 spending limit, and gives double the credit score points than a regular credit card.
Mark, 52, uses it instead of a debit card when paying for small purchases such as a cup of coffee. He pays it off in full each month to avoid paying interest, and also uses other credit cards for larger purchases or business expenses. He says credit cards can be a good way to boost your credit score, demonstrating to a lender you are a responsible borrower who is likely to make loan repayments on time as agreed.
‘I have at least ten credit cards, including my credit builder card. I use credit cards for all my purchases. Credit is not always bad – if you have the right mindset and multiple sources of income, you can use it wisely to create a wealthy lifestyle and freedom for yourself.
‘Use credit cards wisely and maintain them well, making sure you can always pay them off without racking up high interest charges.’
Avoid paying interest where possible
Credit card debt is the most popular form of debt in the UK (excluding mortgages). A third of UK adults carried credit card debt into the new year, according to the annual debt index from comparison website money.co.uk, owing an average of £2,647.
If you owe £2,647 on a credit card with 30 per cent interest and choose to repay £100 a month, you would repay the total – along with £1,377 interest – by June 2026.
At £1,377, the interest payments would be around half the amount you originally borrowed. It’s worth looking at how to cut the interest, and this is where a balance transfer can be a good option, as we explain below.
Balance transfer cards
A balance transfer is a great way to clear your debt more quickly and reduce your interest charges.
Here, you transfer debt from one or more credit cards to a 0% balance transfer card. This card comes with a welcome offer that gives you low or no interest for a certain length of time – perhaps two years or more. It means you can repay the money owed more quickly without your repayments being swallowed up by interest.
There will likely be a one-off fee to pay when taking out the balance transfer card, but this should easily be offset by the amount you save in interest charges.
If you don’t pay off the balance by the end of the promotional period, you will then be charged interest. The aim is to repay the total by this point. If you can’t, you could try switching to another balance transfer card.
Using the above example figures, you owe £2,647 on a credit card and face interest charges of £1,377 if repaying £100 a month for 3.5 years.
By switching to a balance transfer card with 0 per cent interest for 30 months, which charges a 3 per cent one-off fee, you would pay the card off by April 2025 and pay a total of £79 in fees and interest, according to moneysupermarket’s credit card calculator. So switching to a balance transfer card would save you almost £1,300 in interest.
‘These days I’d rather save up for the things I want to buy’
Leia Winch, 38, racked up a large amount of credit card debt over ten years and now she no longer uses a credit card. Leia, a careers adviser from Shropshire, used credit cards to buy furniture and other household items, but only used to make the minimum monthly repayments and was barely making any headway with paying back the money.
In the meantime, the banks kept increasing her spending limits, meaning she could borrow more money, and her overdraft was also maxed out. By 2018 she owed £8,000 across credit cards, overdrafts and loans.
Leia cut back on her spending and stopped using credit cards to get her finances back on track. For others looking to reduce their credit card debt, she recommends switching to a balance transfer card as a priority. ‘I’m now debt free and have a very healthy amount of savings to cover emergencies and I’m also saving to buy a place of my own.
My whole attitude to money has completely changed. I don’t own a credit card anymore. I‘d rather save up for something to buy it,’ says Leia, who documents her approach to money saving on her Instagram @leiasbargains.
Monthly repayments on a balance transfer card
You still have to make minimum monthly repayments with a balance transfer card.
If you miss a payment, the provider could pull the deal.
Also be aware that balance transfer cards are designed to help you clear existing credit card debt.
So try to avoid using the card for spending or withdrawing cash, as you’ll likely be charged interest.
There are some cards that offer 0 per cent balance transfers and 0 per cent on spending, so pick one of these if you are looking for both.
Best balance transfer deals
NatWest longer balance transfer card
0% interest period: 33 months
Fee: 2.90%
Purchases: 0% interest for first 3 months
Other bonus features: none
Sainsbury’s balance transfer card
0% interest period: 30 months or 22 months
Fee: 2.89% or 4%
Purchases: 0% interest for first 3 months
Other bonus features: none
Barclaycard balance transfer Platinum card
0% interest period: Up to 30 months
Fee: 2.98%
Purchases: Interest charged on purchases
Other bonus features: £20 cashback if transferring more than £2,500, up to five months of Apple TV or music
Santander Everyday long term balance transfer card
0% interest period: 28 months
Fee: 3%
Purchases: 0% for first 3 months
Other bonus features: none
NatWest no-fee balance transfer card
0% interest period: 22 months
Fee: 3%
Purchases: 0% for first three months
Other bonus features: none
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