Most Brits Don’t Know How Credit Cards Function
Monday, 24 April 2017
Research reveals, in the UK alone, there are over 60 million credit cards in circulation (carrying over£1.5 trillion), and more than one in ten Brits don’t know how much interest they pay each month
This year, household debt has hit an astonishing £1.5 trillion high, according to data from the Bank of England. Furthermore, unsecured credit borrowed via personal loans and credit cards has increased at its fastest rate since 2005.
More troubling, though, is the over two-thirds of credit card holders who say they don’t know how their cards work. According to MoneySupermarket, thousands of individuals live in the red, completely unaware of their monthly spending, and at least 10 per cent are uninformed on how much interest they pay.
In addition, two-thirds of Brits haven’t checked their credit score in the past year, and one-fifth don’t even know how to do so. This financial obliviousness exposes individuals to dangerous high interest credit cards, which can add thousands to their original debt.
Credit scores are used to establish credit card qualifications, including your interest rate and credit limit. Lenders will approve a better interest rate if your credit score is high, but the lower your score, the higher the interest rate will be.
For example, if an ‘Excellent’ borrower had a credit card with a £3,000 balance, a standard rate would be 5.94%. If the borrower paid back just 4% of the balance each month, it would take over 9 years to pay the full balance (with a total interest of £400).
On the other side, an individual with a ‘Very Poor’ credit score, may only be able to get a rate of 49.94%. That same £3,000 balance, paid at the same rate of 4% every month, would take over 42 years to pay off with a mindboggling accumulated interest of £14,179.
Millions of individuals living in debt are also unaware of 0% balance transfer deals. These can help clear steep debt cheaply and quickly, helping people get out of debt sooner rather than later.
Kevin Mountford, banking expert with MoneySuperMarket, notes: “With almost two-fifths of credit card holders owning more than one card, and many admitting they don’t truly understand the terms and conditions, it’s easy to see how debt could spiral out of control.
“Many people will use their credit card at this time of year which, if used wisely, can help spread out the cost of big purchases, offer protection on purchases and help improve your credit score.
“However, if used badly you could incur unnecessary charges, end up in debt and damage your financial reputation – making it harder to get credit in the future. It’s worth taking the time to get to grips with your credit card so you avoid a financial hangover in 2017.”