How millions are using credit cards to pay mortgages

By BECKY BARROW FOR MAILONLINE
Updated: 06:38 EST, 6 January 2011

Around 2.6million Britons used cash taken out on a credit card to pay their mortgage or rent last year.

A report by housing charity Shelter said many households faced a 'daily struggle' to find the money to keep a roof over their heads.

The findings highlight the financial crisis facing families squeezed by a toxic combination of tax rises, poor pay rises and soaring household bills.

Worried: Couples are 'robbing Peter to pay Paul' by meeting the cost of their mortgages with a credit card, according to the housing charity Shelter. (Posed by models)

Experts fear the crisis will deepen this year as the Bank of England is widely expected to start raising the base rate from its historic low of 0.5 per cent.

For millions of families, who are already struggling to pay their mortgage, a rate hike could tip them over the edge as mortgage repayments jump.

Campbell Robb, chief executive of Shelter, said: ‘This is a totally unsustainable situation.

‘It is one which we fear could see thousands more families pushed into the spiral of debt, eviction or repossession and ultimately homelessness.’

The number of homeowners relying on their credit card has increased sharply over the last year, according to Shelter, which has conducted the research for each of the last three years.

During the recession in 2008 and 2009, it found 4 per cent of households were affected. In 2010, it jumped to 6 per cent.

It said victims realise they cannot afford to pay their mortgage or rent as the payment date approaches, and use their credit card to take out cash which they deposit in their bank account.

But cash withdrawals on credit cards are one of the most expensive ways to get cash because the charges are cripplingly high.

Typically, you are charged 2.8 per cent of the amount that is withdrawn, subject to a minimum of  £3, plus interest charged at an average rate of 25.6 per cent.

To add to the costs, interest is usually charged immediately on the first day that money is withdrawn.

A spokesman for Moneyfacts, the financial information firm, said: ‘Taking out cash on a credit card should be seen as a last resort. It is an expensive way to borrow.

‘If you need cash, you could look at alternative forms of borrowing such as personal loans, which currently have cheaper rates than the majority of cash rates on credit cards.’

The Council of Mortgage Lenders predicts that 40,000 families will lose their battle with their mortgage repayments and have their home repossessed this year.

It comes as rents have reached record highs, with an average of £692 per calendar month, although this rises to an average of nearly £1,000 in London.

Mr Robb said: ‘Using credit cards to pay the rent or mortgage is simply robbing Peter to pay Paul. It is the worst possible course of action.’