Don’t get burnt by existing debt

By Martin Lewis, January 24, 2013
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Don’t wait to deal with debt — costs add up and the situation festers. The first step is not to borrow any more, however, just as important is how you deal with the existing debt. So here are my credit card debt-busters:

1. Shift credit card debts to 2-year 0%
If you have costly existing credit cards and a decent credit score, get a new balance transfer card. Quite simply, this pays off the debts on your old card(s), so you owe it the money instead, but at a cheaper rate. As the rate is lower, more of your repayments go towards clearing the debt, rather than just servicing the interest. The three cards I’d pick right now are Barclaycard, which offers the longest 0% deal — two years with a one-off 3.2% fee of the amount transferred. If you can pay off much quicker, the lowest-fee deal is 1% with NatWest, but you only get 13 months interest free. In between the two is Lloyds at 21 months 0%, but with a relatively decent 1.5% fee.
See www.moneysavingexpert.com/balancetransfers.

2. Lock in card debts at 5.9% FOR LIFE
If you need longer to repay, or are uncertain about repaying, consider the MBNA Rate for Life card for safety. For a one-off fee of 1.5%, new cardholders can shift debts at 5.9% until all the debt is repaid. This is a corking deal to provide long-term low rates for people who don’t want to repeatedly shift cards.
3. Poor credit scorers 0% balance transfers
Most balance transfer deals require you to have a decent credit score. However, currently one card is easier to get, even for those who have been rejected in the past. The Capital One Balance+ card offers 0% on shifted debt until July, for a one-off 3% fee. You still must pass a credit score, yet unusually, it doesn’t auto-exclude those with past CCJs/defaults. After July, it is a huge 34.9% rep APR, so do plan to repay what you borrow by then.
If you won’t be able to do that, compare this 34.9% rate to your existing cards. If Capital One is a lot higher, leave room to “balance transfer” back any debt not cleared in order to save.

4. Don’t need new cards to cut interest
If you doubt you will get accepted for new plastic with a cheap rate, or want to use existing credit more efficiently, there is another way. Some cards let cardholders with room on their credit limit shift other debts to them cheaply. Barclaycard, for example, offer 6.9% for life with a one-off fee of 3%. Find out which cards allow it, list down the rates and available credit limits, then move all your existing debts to where they are cheapest. See www.moneysavingexpert.com/creditcardshuffle for full help.
5. The balance transfer golden rules
If you are applying, it is crucial to follow the three golden rules:
a) Repay at least the set monthly minimum, or you can lose good rates.
b) Always plan to fully repay 0% cards before the 0% ends.
c) Don’t spend on these cards. That isn’t usually at the same cheap rate.

6. Debit cards can be just as dangerous as credit
Many boast they don’t use credit cards, only debit. Yet if you are overdrawn, it is crucial to consider that a debt too — often with higher interest costs and hideous bank charges for exceeding your limit. To deal with them, you could switch to the Halifax Reward Bank account, which currently offers new customers a 12-month 0% overdraft. Yet after that ends, it charges a hideous £1-£3 a day if you are overdrawn, so swicth again. Alternatively, a few cards, mainly from the MBNA stable (be very careful) offer 0% money transfers. This is where for a fee of around 4%, they pay money into your bank account, and you owe the card the cash instead. Done carefully, this can slash costs.

7. Beware minimum repayments Credit card repayments are set as a percentage of what you owe, which means often they only just cover your interest, leaving the debt hardly touched. Borrow £3,000 at 18% and repaying just the minimum can take around 27 years to clear.

8. Repay the card with the highest APR
If you have multiple debts, focus all spare cash on repaying the highest APR one first –—and just the minimums on all others. This way you clear the fastest-growing debt first.

9. Always repay by direct debit
Miss or make repayments late and you risk losing any 0% deals, a fine and a credit score hit. Avoid that by setting up a direct debit to cover at least the monthly minimum — but pay more on top manually.

10. A right to reject APR rises
If your credit card firm tries to increase your standard APR rate, you have a right to reject this, provided you agree not to borrow more.

If you can’t meet minimum payments, you are likely to be in debt crisis. If so, ignore all the above. Instead, get free, one-on-one debt counselling help from Citizens Advice, Stepchange or National Debtline.

    Last updated: 10:24am, January 24 2013