Don't leave sorting your debts out until January. Do it now.
To help, we are seeing some of the best borrowing rates ever, and opportunities to cut costs for those with poor credit. Plus call centres have shorter queues now than in January.
So here are my top debt-sorting tips, though, of course, the prequel to all this is don’t borrow any more.
1. Debit or credit cards?
Spending on debit cards may feel better than credit cards. But, if you are overdrawn, interest rates can be higher. Go beyond the limit, and there are charges too. Therefore, treat an overdraft as a debt. Do a budget to work out how you will pay it, and even consider shifting the overdraft to 0% cards to try to cut costs.
The MBNA card range allows this, letting you shift the overdraft debt to a 0% card for a fee of about 4%. Be very careful — get it wrong and it can cost a fortune. See www.moneysavingexpert.com/superbalancetransfers.
2. Shift existing debts
If you have a decent credit record, shifting existing credit card or store card debts to a new “balance transfer” card can save you £100s or £1,000s.
A balance transfer means the new card repays the debts on existing credit or store cards for you, so you now owe it the money instead, hopefully at a special cheap rate. The longest 0% deals for accepted new customers are currently Barclaycard’s 24mths 0% with a 2.8% fee, MBNA 22mth 2.85% fee and Tesco 22mths 0% with a 2.9% fee. See www.moneysavingexpert.com/bts.
These cards are only interest free for debt shifted to them, not new spending. That’s at a hefty whack so avoid it - and always aim to fully repay the debt before the 0% ends or you’ll pay up to 24% APR on these cards.
3. If you can repay sooner
The longest 0% deals are great if you need time to repay, but they come with a fairly hefty one-off fee of the amount transferred. If you can pay faster, go for a shorter 0% period, meaning a lower fee. These include NatWest at 13mths 0% for a 1% fee and MBNA at 14 months for a 1.25% fee.
4. Lock in credit card debts at 5.9% FOR LIFE
For those who need a lot longer to repay, an alternative to short term 0% deals is MBNA’s Rate for Life card. All debt shifted remains at 5.9% until repaid, though there is a one off 1.5% fee. Always make the minimum monthly repayments though, and don’t spend on the card, as that is at 18.9% representative APR.
5. Poor credit score?
All the cards above require a decent credit history. If not, it is usually very difficult to cut the cost of existing credit, but right now there is a way. The Capital One Balance card lets even some with past CCJs or defaults shift debts for 6 months at 0% (with a 3% fee). That will save money, however, do aim to repay it once the 0% ends as the rate jumps to a huge 34.9% representative APR. If you can’t repay by then, check the APR on your current cards. If they are about the same or higher, you are still saving by shifting the debt. If they are substantially lower, one route is shift debt to this card for six months then try to shift it back to the original card afterwards. Though don’t borrow more and use up that card’s credit limit in the meantime.
6. Repay the highest APR debts first
If you have several cards, throw all spare cash at the highest %-rate one, as that’s where the debt grows fastest, and just pay the minimum on others. Then focus on the next highest.
7. savings to Pay off debts
If you have spare cash, use it. £1,000 in savings at 2% after tax earns £20 a year. If you owe the same on an 18% credit card, it costs £180 a year. Repay the debt with the savings and you are £160 up.
8. reject rate rises
If your card company says it will up the APR on existing debt, you have a right to Reject Credit Card Rate Rises, provided you agree not to borrow more.
9. Set up direct debits to avoid credit damage
Missing a monthly payment or even being late can lead to fines, black marks and losing 0% deals. A direct debit, even for the monthly minimum, protects against that. Yet just repaying the minimum won’t clear the debts quickly, so make manual extra payments on top.
If you are not maxed out on your credit limit, many credit cards have hidden deals allowing you to shift debts to them cheaply. For example Barclaycard sometimes lets existing cardholders shift debts to it at 6.9% for life (for a one-off fee) and Halifax nine months at 0%.
A final thought: I have never seen a case of unsolvable debt. There is always a solution, from cutting interest costs, budgeting, or simply getting free, non-profit one-on-one help. If you need help, make an appointment with a non-profit debt counselling agency.