According to recent figures from the Bank of England, individuals borrowed £0.7 billion on credit cards in April 2022, an 11.6% increase compared to April 2021.
This is the highest annual rise since November 2005.
It’s perhaps not surprising that people are borrowing more on credit cards, as the cost of living crisis is squeezing the finances of households across the UK. It seems likely that many people are having to take out credit to cover some of their basic living expenses, thanks to inflation and the increased cost of energy, fuel, and other everyday items.
Indeed, debt charity StepChange reports that 15% of their new clients said the rising cost of living was the main reason for their debt. This was the second most common reason given (behind a lack of control over their finances) and, by contrast, only 7% of clients gave the cost of living as a reason for their debt in September 2021.
However, if you’re struggling to cope with your everyday living expenses, taking out credit won’t get to the root of the problem. In fact, if you take out credit that you can’t afford to pay back, you could end up in a worse situation than before.
Below are some of the things you need to think about before applying for a credit card, to help you work out if it’s the right step for you.
What do you need it for?
Why you want to take out a credit card can be a good indicator of whether it is right for you or not.
For example, if you feel you need a credit card to cover bills, food shopping, and other everyday essentials, you may consider having a rethink. If you can’t afford to pay these costs with your own money, you’re likely to find it just as difficult to pay off a credit card.
Even though a credit card may temporarily help you meet your immediate living expenses, it’s not a sustainable, long-term solution as expensive debt can quickly pile up if you don’t pay it off.
Credit cards are designed for short-term borrowing, such as spreading the cost of a large purchase, which you know you can repay in full at a later date.
Taking out a credit card to pay off other debt is also unlikely to be a good idea. A survey from Citizens Advice found that 42% of people who had used buy now, pay later (BNPL) in the past 12 months had borrowed money to make their repayments. This rose to 51% among 18- to 34-year-olds.
Credit cards were the most common way that people borrowed to make their BNPL payments, but borrowing money to pay off another debt isn’t sustainable and could make your financial situation worse.
The exception to this could be if you use a cheaper form of borrowing to pay off more expensive debt, such as a 0% balance transfer credit card (as discussed below). However, to benefit from this, you need to be certain that you can afford to make the repayments and clear your debt before interest charges apply.
» MORE: Should I get a credit card?
What is the interest rate?
You need to consider how much borrowing on a credit card will cost you in interest.
The interest rate on credit cards can vary. Some of the best deals will come with a 0% interest rate for a specified period, while other cards may come with a relatively high rate of interest from the start.
The credit cards and the interest rate you qualify for will depend on your credit score and other factors.
When you apply for a credit card, you will be able to see the annual percentage rate (APR) of the cards you qualify for. The APR shows you the total cost of borrowing, taking into account the interest rate and any fees. This can help you to compare deals without having to look out for any hidden fees.
Bear in mind that you won’t necessarily get the advertised representative APR. Only 51% of successful applicants will get the advertised rate (or even a lower rate), and the other 49% could be charged a higher rate.
Because of the interest charges, credit cards can be an expensive way to borrow if you don’t pay them off relatively quickly. However, if you pay off your balance in full each month, or before a 0% rate ends, you won’t need to pay any interest at all.
Are there any fees?
In addition to interest charges, credit cards can come with a range of other fees, such as:
- account fees
- cash withdrawal fees
- foreign transaction fees
- balance transfer fees
When comparing credit cards, you should always check if there are any extra charges. If you know how you plan to use the credit card, you can figure out if any of these fees would apply to you and so work out which cards could be most suitable for your circumstances.
» MORE: Credit card charges and fees explained
Are you eligible?
Only apply for a credit card if you’re confident that you will be accepted. Any submitted applications for credit will be recorded on your credit file and could affect your score, so you should try to limit how many times you apply.
Multiple applications for credit, whether you’re accepted or rejected, in a short space of time could send warning signals to lenders and affect your chances of borrowing in the future.
You can often check your eligibility for a credit card before formally applying. This allows you to see how likely you are to get a credit card and won’t affect your score.
But, even if you are eligible for a credit card or other form of credit, you should think carefully before applying and consider all your options.
Sue Anderson, head of media at StepChange, says: “Before you do borrow money, ensure you take time to do your research to find out what’s on offer. This will help you avoid being drawn into taking out short-term, high-cost loans as their incredibly high interest rates can make any delay in repayment extremely costly.
“If you have a poor credit history, you may find that high-cost credit is the only option available to you. In this case you may be eligible to get a loan from your local credit union, which can provide loans at low interest rates and help you with saving. To find out whether your local credit union might be able to help you, find a credit union near you, and get in touch with them.
“Most importantly, if you do borrow money, make sure to budget and plan ahead to ensure that you can afford to make repayments in a reasonable amount of time.”
Do you have any existing debt?
If you have any existing credit card debt, you should think carefully before applying for any further credit cards.
If you’re not managing to pay off your current credit cards, then you need to consider whether you could realistically afford to make payments on another card.
However, it may be worth seeing if you’re eligible for a special type of credit card, known as a 0% balance transfer card.
With these cards, you can move the balance from an existing credit card to another card which charges 0% interest for a specified period. You usually need to pay a fee to do this, but the money you save on interest could outweigh this cost.
Moving your credit card debt to a 0% balance transfer card stops interest from accumulating on your debt, as long as you make at least the minimum payments required, stay within the card’s credit limit, and pay off the card by the time the 0% rate expires.
Missing one payment could mean you lose your 0% rate.
Paying more than the minimum will help you to clear your balance before the end of the interest-free period. If you don’t clear your balance before the 0% interest period ends, you could face high interest rates.
Bear in mind that you will typically need a good credit score to qualify for these cards.
Can you afford it?
This is the key question you need to ask yourself before applying for a credit card or any other form of credit.
If you are confident that you will be able to pay off a credit card, then it may be a suitable option for you.
Especially if you know you can avoid paying interest by clearing your balance each month, or by paying off your card before a 0% interest rate expires, a credit card could be a useful way to borrow money over a short period if managed correctly
Before you apply for a card, you should work out a budget to see if you could afford to repay the amount you want to borrow.
If you’re struggling to cover your expenses and you’re not confident that you will be able to make your credit card repayments and clear your balance, a credit card probably isn’t the answer to your problems.
Even if you manage to make the minimum payments each month, interest will continue to accumulate on your debt. This could become expensive very quickly and potentially leave you facing debt that you can’t afford to pay off.
Instead of taking out a credit card to try to address your money worries and risk getting into problem debt, it would be better to ask for help immediately.
StepChange’s Sue Anderson also recommends that “if you’re behind on your bills, talk to your creditors – if they don’t know you’re struggling they won’t be able to help. You might be able to negotiate a payment plan with your bank or take advantage of a grant that can pay off some or all of a utility bill.”
She also says: “It’s important to make sure you are getting all the help you are entitled to. StepChange’s benefits calculator is a really good place to start in helping you easily identify any benefits you can claim to help increase your income and improve your situation.”
If you are experiencing financial difficulties, you should ask for help as soon as possible.
There are many debt charities and other organisations that will be able to offer free advice on your situation and help you work out a way forward.
» MORE: Where to get debt help
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