Over the past year, a lot of us have changed our spending habits. Being forced to stay at home and forgo things like socialising has meant many of us have had a bit of extra cash to hand. And up until April 2021, it looked like Brits were using this money to pay off their credit card debts.
However, the latest statistics from the Bank of England have revealed that things have started to shift. In fact, as Sarah Coles, personal finance analyst at Hargreaves Lansdown, commented “The golden era of debt repayment started fading in April, and is likely to be eclipsed entirely now the summer spending spree is upon us.”
With the end of Covid-19 restrictions, you may be looking towards a summer of fun. But that doesn’t mean your budget should go out of the window. Let’s take a look at how to avoid giving up your debt freedom while still managing to enjoy yourself.
[top_pitch]
Are we spending more on our credit cards?
Back in April, Brits were repaying more of their credit card debts than they were spending. Meanwhile, others cut up their cards and closed their accounts.
But as the world started to reopen, there were more opportunities to spend our cash. As a result, demand for new borrowing increased in the three months to June. And banks expect it to rise again in the three months to September.
Overall, in June, consumers borrowed £0.3 billion as consumer credit. So credit card spending is definitely on the up.
How can you avoid taking on more debt?
Now that things are opening up again, it’s tempting to splash the cash a bit and enjoy yourself. But with that comes the risk of putting yourself in financial difficulty.
So before you reach for your credit card, consider whether there are other ways of freeing up some cash.
Monthly budgeting is a great way of knowing how much disposable income you have. You can see what your fixed costs are, and what costs you could potentially cut back on in order to free up some money.
For example, can you reduce your bills? Shopping around for a better deal on your car insurance or your electricity bill could cut your monthly fixed costs.
Similarly, are you able to cut the cost of your supermarket shop? Shopping for own-brand products or buying bulk could reduce your food bill and free up some extra cash.
Before reaching for a credit card, it is always a good idea to see where in your budget you can make some changes that could help to boost your disposable income.
And if you do end up wanting to use a credit card, maybe opt for a 0% purchases card. This will give you an interest-free period on any purchases you make. This means that if you pay off your balance before the end of the promotional period, you can avoid interest charges altogether.
[middle_pitch]
What if you already have credit card debt?
If you already have an outstanding balance on your credit card, then you should prioritise paying this off before spending elsewhere.
This is because credit card interest rates are typically quite high. Plus, compound interest means that it is all too easy to find yourself in a debt spiral.
Alternatively, if you are struggling to repay your debt, but have a decent credit score, then one option could be to apply for a 0% balance transfer card.
This type of credit card offers an interest-free period to pay off any balance you transfer to the card. They typically charge an initial balance transfer fee. But after that, they can significantly reduce the cost of your borrowing.
The main thing to remember, though, is to pay off the balance before the promotional interest-free period ends and the credit card returns to its standard rate.
