Want to retire earlier or with more money? Find out why you need to clear your credit card debt.
When it comes to credit cards, are you a revolver or a transactor? Around 35 million people in the UK have a credit card, and 18 million people of those have credit card debt.
Credit card debt is expensive. The annual percentage interest rate, (APR), including fees and charges, can range from 0% to over 60%. If you have an average credit history, you’ll probably pay around 25%.
To show you just how expensive this is, the average annual return from the from the FTSE 100 between 2006 and 2026 was 6.4%. And yet, despite this, an alarming number of people are carrying debt on their credit card.
What are transactors and revolvers?
When it comes to managing credit cards, you can roughly split people into two groups, known as transactors and revolvers:
- Transactors are people who pay off their credit card balance every month and so incur no interest charges.
- Revolvers are people who occasionally or regularly pay off only part of their monthly balance, and therefore incur interest charges.
In 2024, 48% of UK adults held some form of credit or loan. A 2018 study by the Financial Conduct Authority (FCA) found 1.6 million people only paid the minimum amount each month, typically between 2-5% of their outstanding balances.
In 2022, the average outstanding balance for adults who revolve a balance on a credit or store was £550. And 26% of people who had persistent credit card debt paid more in interest, fees, and charges in 2022 than they paid off their cards.
People aged 35-54 are most likely to hold consumer credit, with 60% of 35–44-year-olds and 58% of 45 to 54 year olds doing so. And women are also twice as likely to revolve credit card debt than men.
Why do people have credit card debt?
So why don’t people pay off their credit card debt? The simple answer would be because they can’t afford to. But this isn’t strictly true; it’s also a simplification of the real cause.
Some people don’t pay their credit card debt off in full because they have got into the habit of making minimum payments each month. Maybe they aren’t aware of just how much this habit is costing them.
Others believe that keeping a small amount of debt helps bolster their credit rating. Again, there are cheaper ways to do this. And having a high credit card balance actually hurts your credit score.
For some people, credit card debt triggers stress and avoidance, even when it’s possible for them to repay it. So they stop opening mail or emails and just pay what they need to each month, which is usually the minimum.
Incredibly, some people have enough savings to pay off their credit card debt, but they choose not to. The reality is that they are undoubtedly earning less in interest or growth on their savings than they are paying to service their debt. So month on month they are actually getting poorer.
And yes, some people are aware of how much it is costing them to keep debt on their credit card, but have built up an amount that they cannot pay off.
How to pay off credit card debt
So what can you do if you have credit card debt that you can’t repay right now? Here are some strategies that people use to reduce it and clear it.
Move your balance to a 0% balance transfer card
Some credit cards offer 0% interest on transfers. This will stop your interest payments for now, and give you time to pay off your debt. Just watch out for any transfer fees (these can be around 2-3%) and make sure you clear or move your debt before the 0% period ends.
Tackle the card with the highest interest first
If you have more than one credit card, you can use the Debt Avalance Method. This involves paying the minimum amount on all your credit cards, then focus on paying off the balance on the card with the highest interest first. When that is cleared move to the next highest, etc.
Clear the smallest balance first
If you feel overwhelmed by your debt and have balances on more than one credit card you can use the Debt Snowball Strategy. You pay the minimum balance on all your cards, and then target paying off the smallest overall balance first. This can help to give you a psychological boost to keep going.
Consolidate your debt into a personal loan
To make your debt easier to manage, and save on the high interest fees, you can take out a personal loan to pay off all your credit cards. This gives you one payment a month, an end date to work towards and saves you money.
Find the solution that works best for you (some may require a good credit score). But make sure you do something today; every month you leave money on your credit cards is costing you more in expensive interest fees.
To to stop building up credit card debt
Once you clear your credit card debt, how can you stop it building up again? I recommend reviewing your budget (I talk you through doing a money audit here). Work out how much you spend each month on necessities and nice-to-haves and cut down where you can until you reach a point where you are spending less each month than you are bringing in. Then make sure you pay your credit card balance off in full, every month.
If you know you have big expenses coming up, such as a holiday or car insurance, make sure there is enough in your bank account to cover it so you can still clear your balance.
Personally, I use my credit card for all spending other than essential household bills, which are paid by Direct Debit. This means that I know exactly what I am spending every month, and can easily check if I am living within my means. If you have a credit card with rewards, it also means you build up more of these.
I then pay off my credit card in full every month by Direct Debit, which means I don’t pay any interest. And this is the important point, Credit cards in themselves aren’t bad – they are simply a financial tool. If you use them correctly then you won’t build up debt nor pay high interest charges.
So, to avoid building expensive credit card debt in the future, you need to do two things:
- Set a budget and ensure you always spend within your means
- Set up a Direct Debit to automatically clear your full balance every month
If you follow this simple process you should be able to avoid building credit card debt in future.
What does carrying credit card debt have to do with your retirement?
You may be wondering why we’re writing about credit card debt on a retirement website. But there’s a very good reason. And that is simply that the money you may be paying in interest servicing your credit card debt is money you are not saving for your retirement.
By taking control of your finances now, you’ll build better financial habits that will enable you to invest more money in a pension or other savings product, such as an ISA, or pay more off your mortgage, and give you a bigger pot to live on when you retire, thanks to compound growth.
You’ll also find it easier to live on whatever funds you manage to save for retirement, or have the freedom to retire earlier when you are living within your means, and better able to budget on a monthly basis.
So if you are a revolver, take a look at your financial position and look for ways to clear your credit card debt, then try to get in the habit of being a transactor. The future you will thank you!
