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Struggling with credit card bills

If you've been reading our article on personal budgeting then you may well have concluded that you're spending too much money each month on credit cards. Don't worry - you're not alone!

When we use credit cards to buy things in shops, it can often seem like we're not using real money. We may think of this as being a fairly harmless way of spending. But the reality is that most credit cards tend to have high rates of interest. This means that, if you don't pay your bill immediately, the costs can soon add up.

So just how big are those rates of interest? Well, the answer is that they can be massive.

Let's take a look at some figures.

Right now, a typical current account will pay a very low interest rate. Many seem to be paying as little as 0.5%. That means that you are probably earning very little on any money that you are holding in a current account.

If you've got a sizeable amount of money and have been following some financial advice, then it's likely that you're making use of a savings account. These will generally, of course, pay a higher rate of interest. By the time that you have paid tax, you may be receiving somewhere around 4% on any money deposited in this way.

So these are the sort of rates of interest that banks and building societies are paying to you, in return for you deciding to deposit your money with them.

Now, let's take a look at the other side of the coin. What happens when we want to borrow money from those same banks and building societies.

The first thing to say is that they don't tend to lend us money at a rate of 0.5%! Even with the current (at the time of writing) low UK interest rates, you might be looking at borrowing at a rate of anything up to 10% for a loan (maybe less for a mortgage if you have a good deal).

That sounds high. But we've not even mentioned the rate of interest on many credit cards. Some are truly eye-watering. Many have interest rates of around 17%. That's incredibly high.

Reducing credit card costs

The impact of this on you could be massive. Those credit card bills are costing you a lot of interest every month. You may be struggling to meet the minimum payments. You may find that you're doing little more than paying off the interest.

So how can you go about reducing those costs? There are a number of options.

Clear your credit card balance

The first option would be to clear your credit card balance. Few people may be in a position to do this, but it's a sensible option for those who are able to. Since the rate of interest is so high, it makes sense to clear this debt as quickly as possible.

Even if you're not in position to do that right now, you may be able to come up with a plan. You'll probably want to clear this debt fast.

Balance transfers

How about balance transfers? You may already know about these, with many credit card providers choosing to send out details about these at regular intervals. They tend to suggest that they have interest rates of 0%.

This sounds too good to be true. What should you look out for?

The first thing to say is that these balance transfers can be useful in terms of reducing your level of debt. But you need to be clear about how they work.

In particular, it's worth noting that you will probably incur a charge when carrying out a balance transfer. Typically, this charge may be around 3% of your outstanding debt. So, if you owe £5,000 then you're looking at a charge of £150.

The promotional rates usually only last for a limited period of time. At the end of that period, you'll find that the outstanding balance reverts to a higher rate of interest. You need to be aware that this will happen. Ideally, you'll pay off the whole debt prior to this point. But you may not be able to. You might consider carrying out a further balance period at this stage.

Debt consolidation loans

These are often in the headlines right now. The idea is that you can consolidate all of your debt into one single debt. Why should this be worthwhile?

The answer is that this may be worth considering if you're left with a new debt at a lower level of interest than you're existing debt. The devil may well be in the detail. You need to sit down and do your sums. Will this allow you to save money over time?

In summary: credit card bills

The key thing to remember here is that credit cards often represent an expensive way of borrowing money. This means that you're best approach will be to reduce those borrowing costs.

Outlined above are some strategies that could help you. Remember that you always need to sit down and work out what's best for you. If you're in any doubt then you can always consider independent financial advice.

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