Consumers squander £3bn on unnecessary interest payments

Consumers are stashing away money for emergencies but they are also burning money unnecessarily by carrying credit-card debt at the same time.

A study by Fool.co.uk shows that many people who owe money on their credit cards are also saving money for a rainy day. Around one in six people who regularly carry over £400 to £500 of debt on their credit cards have £3,000 stashed away for emergencies.

In the UK, the average person has 2 or 3 credit cards, and one out of five cardholders regularly roll over balances on their interest-bearing cards. The study reveals that consumers carry over £1,100 on their cards monthly, and one out of five people leave as much as £3,000 unpaid.

Meanwhile, the average person manages to save around £300 each month, and we have £870 sitting idle in our current accounts. Additionally, we have put away £2,526 for emergencies, and one out of ten people have between £500 and £3,000 stashed away.

It seems many people are prepared to pay interest on outstanding balances even though they have the means to clear their credit-card debts from existing savings. On average, cardholders pay £165 interest a year on the outstanding balance of £1,100 at 15%, but receive interest of just £66 on the same amount in a high-interest savings account at 6%. This means Britain’s 31 million credit cardholders squander £3 billion a year on unnecessary interest payments.

People aged between 34 and 41 are the most likely to have savings and credit card debts simultaneously. They have around £1,000 of credit card debts, but also have around £750 in savings.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “We are often told to put aside money for a rainy day because having a ready source of funds for emergencies is a sensible thing to do – and it is.

“But it makes little sense to have a stash of money earning interest at 6% a year when a pile of debt is burning a hole in our finances at 15% annually.

“Saving money before you have paid off your debts is like trying to fill a bath without putting the plug in first. It’s a pointless exercise that results in a waste of water, an empty bath and hefty water bills.”