This is a golden time for those in debt. While that may seem a strange thing to say, the best ever deals for cutting loan, store or credit card costs are now on the market. So if you have existing debts, a little bit of action could save you hundreds or thousands of pounds.
The aim is to cut the interest rate you pay, so more of your repayments clear the debt rather than servicing the interest, so you are debt-free far quicker.
STOP BORROWING
Borrowing more just makes the problem costlier and longer-lived. You can’t borrow your way out of debt. The tips below are about getting new products, not borrowing more.
CREDIT & STORE CARD DEBT
Shift to 31 months 0 per cent. If you’ve debts on cards, do a balance transfer. This is where you ask a new card to pay off debts on other cards, so you owe it instead, hopefully at a cheaper rate.
Currently, accepted new Barclaycard customers can shift debt to it at a new record 31 months 0 per cent with a 2.99 per cent fee. Halifax is 30 months with a 3 per cent fee, or, if you can repay quicker, Lloyds has a 24 month 0 per cent card with a lower 1.5 per cent fee. But be aware that deals can change daily.
To get a card, you must pass a credit score. Usually the only way to find out is to apply, which marks your file. To get round that, find which card’s most likely to accept you with my free Eligibility Checker at www.mse.me/eligibility
Follow the balance transfer golden rules:
- Always repay at least the set monthly minimum, or you lose special rates.
- Always plan to shift the debt again or fully repay before the 0 per cent ends, or these cards’ rates jump to 18.9 per cent and 17.9 per cent representative APR.
- Don’t spend on these cards – it’s usually not at the same cheap rate.
LOAN DEBT:
Can you cut the cost? This is more difficult, as most old loans charge up to two months’ interest to repay early, which needs factoring in.
It’s worth trying if you can get a much lower APR loan (ie, more than a fifth off) and have a while left to repay — especially if your credit score’s improved since getting the loan.
What are the cheapest loans? For accepted customers getting £5,000 - £7,500, Sainsbury’s Bank is 5.7 per cent representative APR. Borrow over £7,500 and Santander offers 4.5 per cent representative APR.
Sadly, these are “representative APR”, so only 51 per cent of accepted applicants must get the advertised rate. Others can pay more.
OVERDRAFTS/ CATALOGUES
Shift to 0 per cent. If you have a costly overdraft or need to put money in a bank account to pay off catalogue debts, there’s a way to use a credit card for this.
A few balance transfer cards let newbies “money transfer” cash into your bank account, so you then owe the card instead.
Most cards don’t do this at a cheap rate, but MBNA Platinum offers accepted new customers 29 months 0 per cent for a 4 per cent fee and Fluid is 28 months, 4 per cent fee. Both are 22.9 per cent rep APR after, so pay off by then.
You could, of course, find a 0 per cent overdraft. Both First Direct and Nationwide offer this if you switch to them, but the amounts offered are usually limited.
- Don’t repay all debts equally — attack the highest APR first. Once your debts are as cheap as possible, list them all, including overdrafts, in order of APR. Then focus every penny on clearing the highest APR one as it grows fastest, just paying the minimum on the others. Once that’s clear, move to the next highest.
The more you pay off, the better. If you just stick to minimum repayments, you’ll take years or decades to be debt-free (they’re designed so you just clear the interest). The exception to the “highest APR first” rule is loans with penalties for overpaying early.
- Set up a direct debit to protect your credit score. Forget or make late repayments and you risk losing 0 per cent deals, being fined and suffering a hit on your credit score.
So set up a direct debit to cover at least the monthly minimum, then manually pay more on top each month.
l Got both debts and savings? Stop. £1,000 credit card debt at 18 per cent costs £180 a year, while the same amount saved in top paying savings earns just £15 before tax.
If you’re thinking “yes, but I like some spare cash”, this is often false security.
- Free debt crisis help. While my tips above should help cut the cost of debt, for some people that is not enough. However, if you’re struggling to meet your minimum repayments and basic bills, have non-mortgage debts bigger than a year’s salary, or cannot sleep for worry, you are likely to be in debt crisis.
If so, ignore the options above and contact a non-profit debt advice service that uses a different set of solutions, such as StepChange, Citizens Advice or National Debtline.
Don’t worry, they’re there to help, not judge.