The Curse of Credit Card Dependency

A credit card is designed to be a convenient method of payment for goods and services. However, individuals that are struggling to keep pace with household bills are treating credit cards as a source of long term borrowing. Whilst a borrower with good credit can get a best-buy unsecured loan for 7.9%, the rate of APR on credit card debt is considerably higher. According to CreditAction.org, the average rate of APR charged on credit card balances is 17.42%, which is over 120% higher than on personal loans.

Credit card owners that make only the minimum monthly payment could find that they are still paying off credit card debt 40 years from now. As soon as debt is paid off, it is quickly utilised again, thus sending consumers back to square one. To make matters worse, these same people are vastly more likely to incur late payment charges and utilise costly cash advantages.

Statistics produced by uSwitch.com show that 7.3 million consumers use credit cards to take cash advances. The cumulative amount of cash advance withdrawals amounts to a colossal £3.7 billion per annum. They estimate that over one million people are using cash advances to cover mortgage and loan and payments. They also believe that in excess of 700,000 people are withdrawing cash from one credit card to meet financial commitments on another. Excluding fees for making the withdrawals, uSwitch.com estimates that the average APR for cash withdrawals is a shocking 29.97%.

Adverse credit card providers were quick to identify the demand for cards for consumers with bad credit. Whilst CreditAction.org has calculated that the rate of APR is 17.42% on conventional credit cards, the rate of APR is upwards of 35% for bad credit customers. Adverse lenders are prepared to offer bad credit customers limits of up to £2,500 with reviews after 4 months. Although based on affordability, adverse credit cards can only serve to exacerbate financial difficulties for people that do just make the bare minimum payment or are reliant on cash advances.

Even those with existing arrangements are facing higher interest rates on credit card debt. Banks are assessing their clients to identify higher risk categories of customer. Whilst it is true that 120,000 EGG customer have benefited from an interest rate reduction, almost 20% of its customers now face an APR of 26.9%. This is a trend that is likely to continue as lenders continue to re-classify their customers. Meanwhile, recent research by CCCS found that the average UK adult has credit card debt approaching £2,300 and a significant increase in credit card debt for the elderly.

Given rising living costs and levels of unemployment, it isn't really surprising that credit card debt has worsened in the UK. Credit cards can be a poor source of long term borrowing due to their high interest fees so consumers should always use them with caution

Useful links: IVA | Debt Help | Debt Soluations