Is your credit card getting close to the danger point?

Here is a simple way to think of your credit cards and catalogue accounts using the traffic light colours. It’s meant as a warning signal that you may have problems in the future.

If you are in difficulty with bills or debts now, it’s too late for this early warning to help… have a look at your possible options and get some debt help now!

Red – Amber – Green

First you need to compare the balance on the card to your credit limit. Your limit will be shown on your credit card statement.

Say you currently owe £1,000 and your limit is £4,000 – in this case you are using 25%. But if your limit is only £1,250 the same debt would be a much higher 80% of your limit.

The traffic light coding then works like this:

• Red if you are using over 90%. This is the danger zone. You need to stop using the card and start paying it off.
• Amber if your balance is between 30% and 90%. That’s a wide range – obviously if you are nearer to the 90% point you may have problems sooner, but if you are down close to the 30% level it’s much safer.
• Green if your balance is under 30%.

The idea is that if you have a lot of spare credit then you probably aren’t in financial problems at the moment.

You will also be better placed to cope with an unexpected bill in the future. Having unused credit gives you options.

Why those numbers?

I haven’t just made these numbers up – I have taken them from Experian who use these ranges in calculating your credit score:

• if your card balance is over 90%, 50 points is taken off your credit score, even if you are making all the repayments on time.
• if your balance is under 30%, you get an extra 90 points.
• you get an even bigger boost – an extra 60 points – if you have a zero balance. But you probably aren’t feeling worried about the credit card if you have, so I’m ignoring that here!

Credit score calculations are complicated so if you have two cards you can’t just add up those numbers. But these give you a feeling for the impact on your credit rating – you can find out more guidelines here: How much will my Credit Score change if…?

The other warning signal

How much of your credit limit you are using isn’t the only thing that matters. Another warning signal is if you are only paying the minimum to a card or a catalogue.

People like credit cards because they are flexible and you don’t have to pay the same every month.

It’s fine to pay the minimum in December when you have a lot of other expenses, or if you have just paid a big bill from the garage for your car. It’s also fine to pay the minimum to a “cheapish” credit card while you are paying off a more expensive debt.

But if you have been paying the minimum for months and you think it would be difficult to pay more, then this is “the minimum payment trap”. It takes a very long while – often 15 or more years – to clear a credit card if you only pay the minimum each month.

The regulator says there are millions of accounts in this situation. In April 2017 it has started talking to lenders about what they should do to encourage people to repay their balances faster, but that could take many years to happen… it won’t help you now.

Luckily there is a way out of this trap if you can stop using the card even if you can’t afford to repay a lot more.  You need to fix your monthly payments at their current level. This may not seem likely to work, but see 4 reasons to fix your monthly payments for details about how it does.

Can’t stop using your cards?

Getting your balance down on a card isn’t going to work unless you stop using it or cut it right back. If you don’t think you can manage this, you need some debt advice.

You may not think your problem is that bad, but if your card balance carries on going up the minimum amount increases. In a few months or a year you will be in a much worse position.

Here are some good places to get debt help, depending on where you live, if you are self-employed, etc. Debt advisers actually like speaking to people early on, before a crisis has happened, so don’t worry that you will be wasting their time.

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