Think Money

Think Money

March 10, 2009 07:35 ET

Caution Needed Over Credit Card Debt

LONDON, UNITED KINGDOM--(Marketwire - March 10, 2009) - Financial solutions company Think Money has welcomed figures suggesting that more consumers are relying on debit cards rather than credit cards to fund day-to-day purchases, saying that it represents a greater awareness amongst consumers of the need to avoid excessive debt in the midst of a recession.

It added that while credit cards can be a useful means of funding some purchases, consumers should be careful about how much debt they incur as the economic downturn continues.

Figures from UK payments association APACS showed that in 2008, debit card spending rose by 9% to Pounds Sterling 245bn, up from a total Pounds Sterling 224bn in 2007. By comparison, credit card spending rose by only 1.6% - Pounds Sterling 126bn in 2008, up from Pounds Sterling 124bn in 2007.

Of all purchases made using cards, debit cards accounted for three quarters of transactions in 2008, according to the BBC. Meanwhile, the use of cheques fell by 10.4% compared with 2007.

The figures from APACS also show that the number of debit cards in circulation overtook credit cards in 2008. In 2007, there were 72 million debit cards and 73 million credit and store cards in circulation. Last year, there were 75 million debit cards and 71 million credit cards in circulation - further evidence that consumers may be becoming less reliant on credit as the economic crisis continues.

A debt expert for Think Money said: "We have already seen evidence that the credit crunch and economic crisis has caused many people to rethink their spending habits - for example, increased profits for 'budget' stores such as Lidl and Aldi, and a falling trend in overall retail sales. The shrinking usage of credit cards may be another indicator of changing attitudes amongst consumers.

"Used correctly, credit cards can be very helpful - as an emergency source of cash, for example - and some people prefer to use credit cards to make most of their purchases, as many include free purchase protection insurance.

"However, it's important to remember that a credit card purchase is a debt from the day the purchase is made, and as such borrowers need to ensure that they stay on top of these debts. A lot of debt problems occur due to people falling behind with their credit card repayments, and the fact that the APR on credit cards tends to be higher than other forms of debt means that the debts can grow very quickly.

"We advise that credit cards should be used in moderation - perhaps with a low credit limit - but ideally, for people looking to limit their chances of falling into debt, it's often a good idea to stick exclusively to debit cards if possible.

"Overdrafts on debit card accounts are often just as useful as a credit card, and the interest rate is often lower, so this may be a preferable option for some people."

However, the Think Money spokesperson added that much of the reduction in credit card spending may be due to existing credit card debts.

"In times like this, it's especially important that any existing debts are being taken care of. If someone becomes unemployed or experiences a reduction in their income, their ability to repay their debts can be severely affected, so it makes sense to tackle them early.

"We advise anyone struggling with existing debts to speak to a professional debt adviser, who can discuss the options available to them."

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