4 wrong ways to pay credit card debt

By Michael Lloyd

Plenty of Brits struggle with credit card debt, and end up resorting to unwise measures to pay it down.

Take, for example, Alan, 51, a service engineer from South Liverpool. He ended up at the debt charity PayPlan after getting in over his head with debts that had been accruing for 20 years.

"I had a couple of credit cards and the companies kept upping the limits," he's quoted as saying in a PayPlan case study. "Basically, I was just overspending, not on anything in particular: a couple of holidays, clothes, day-to-day living expenses. I didn't realise how much money I was going through."

A couple of times Alan took out loans and upped his mortgage to pay off his credit cards, but instead of getting rid of the cards he continued spending on them. Eventually, his debt climbed above £30,000, and he couldn't afford his household bills.wrong-way-to-pay

Desperate times result in desperate measures
Situations like this are not uncommon in the UK.

In July 2016, the Financial Conduct Authority (FCA) published its market study, which found that while the market works for most consumers, there was significant cause for concern about the "scale and persistence of potentially problematic debt". 

It found that 3.3 million people in the UK had been struggling to repay credit card debt for more than 18 months.

People may be struggling to make their minimum payments, but still keep spending. Eventually some resort to ill-advised methods to repay, as Alan did when he remortgaged his home and turned to loans.

"Many [of our] clients start by making minimum payments but then spend more and more on the cards until they get to the point that even making that becomes a struggle," Jane Clack, a money advice consultant at PayPlan, said in response to emailed questions. "That's when they start robbing Peter to pay Paul.

"We have seen people with over 20 credit cards, including some with the same company. The vicious circle has begun and people are like hamsters on a wheel desperately trying to get off."

When things get to this stage, you may start looking almost anywhere for the money you need to make your payments. This might keep you out of default for a while, but paying off persistent credit card debt the wrong way can have far-reaching repercussions.

Here are four common mistakes:

1. Not prioritising debts.
It's important to make sure you pay your priority debts before others. Priority debts are those that, if left unpaid, can result in serious consequences such as imprisonment or repossession of your home.

Credit card debt is unsecured, so it's not considered a priority debt. While failing to pay your monthly minimum payment may prevent you from borrowing money elsewhere or land you in default, it won't result in your utilities being cut off or a visit from the bailiffs.

Don't pay your credit card minimum with money you need for priority debts, or you're going to be looking for that money later. You may even end up using your card to pay the priorities, thus continuing the cycle.

2. Using payday loans.
When money's tight, it can be tempting to turn to a payday loan firm. Spending £25 to borrow the £100 you need to get all your credit card accounts in order can sound like a good deal if you're desperate to keep your credit record clean.

However, apart from the exorbitant interest rates payday loan companies charge, taking out a payday loan will only mean more bills to pay next month. The penalties for not paying a payday loan lender on time can also be high, and have the potential to push you further into debt.

3. Using cash advances or credit card cheques.
Zero percent deals on balance transfers or cash transfers can be great ways to clear your credit card debt without interest, but taking a cash advance from another card can be costly.

Paying off one card with money you've taken from another at a cash machine or using a credit card cheque to clear your minimum monthly payment will typically cost you more than what you were paying on the card you paid off. That's because interest on these methods starts accruing the day you get the money or use the cheque, rather than at the end of a billing cycle. Plus, the fees for using these methods are often high.

4. Remortgaging, releasing equity and dipping into pension funds.
While it's OK to use general savings to pay credit card debt, dipping into pension funds, releasing equity you've built up in your home or borrowing more money against your property can lead to bigger problems down the line.

"Consolidation by remortgaging or releasing equity has far-reaching effects and if one has little equity in the property, this is almost impossible to do," Clack said. "Similarly, using pension drawdowns or savings is only going to set up problems for retirement."

Get professional help
If you're considering or have resorted to any of the above actions, and you've exhausted more favourable options, such as balance transfers or low-rate consolidation loans, it's time to talk to a debt charity or other debt help service.

"Advice such as, ‘Pay more to the credit card with the highest rate of interest' isn't much help as people cannot even make the minimum payment," Clack said. People who are at that point really should seek professional help.

Financial education can turn someone who's continually struggling into someone who is financially capable. "This does not mean they never get in to debt, but financially capable people are able to respond early and do something about it."

See related: Prioritising debt: Which bills are essential?, Negotiating with collections agencies, FAQs on FCA proposal for helping consumers with persistent credit card debt

Updated: 1 August 2017