It isn’t just about cost reduction, it can mean you’re debt free quicker too – as if you pay less interest, it means more of your repayments clear the actual debt. And now’s the perfect time to do it. As so many people look at their debt costs at the beginning of the year, lenders throw out better deals to attract your custom.
I’m going to tackle each debt type one at a time, but before starting, if you have any savings, it’s often best to use those to clear debts. The cost of borrowing is normally much higher than the reward from saving.
1 Credit Cards – cut costs to 23mth 0% no fee
This is easy, as there’s fierce competition. It’s all about balance transfer deals, where you get a new card that repays debts on old cards for you, so you owe it instead.
www.Halifax.co.uk has just launched the new longest-ever 23 month 0% debt shift, that has no fee. If you’re not sure you can clear your debt within that time, go longer. The longest 0% deal is www.MBNA.co.uk Platinum card at 39 months 0% with a 2.98% fee.
Yet don’t just apply in hope, as that hits your credit file. My full best buys guide at www.mse.me/balancetransfers includes a free eligibility calculator, which gives card-by-card odds of which you’re most likely to get – so you can home in on your winner.
The results can be powerful, as Michelle emailed me: “Thank you. I was paying through the nose for £1,700 on Capital One, it’d have taken YEARS to pay it off. I tried your eligibility checker, got 36mths 0%.” That’s an interest saving of about £980.
Yet if you do balance transfer, always follow these golden rules.
a) Never miss the minimum monthly repayments, or the bank can end your 0% deal and charge far more.
b) Clear the card or balance transfer before the 0% ends, or the rate rockets to 18.9%-20% APR.
c) Never spend on the card or worse withdraw cash. They’re not usually at 0%.
2 Store cards, shift them to 0% too.
These are just credit cards you only spend with at one store or group of stores – but with far costlier interest. For example, Debenhams’ is 24.9% APR and Homebase 29.9%. But they can be balance transferred, so follow the steps above.
Before you read on – you need to understand 0% money transfers
I’m oft asked if you can shift loans, overdrafts or other debt onto 0% credit cards. You can, but only via a specialist 0% ‘money transfer’ deal, yet this opens a wide door for cutting loan, overdraft and other debt costs – so let me brief you before you carry on.
Money transfers are a rare specialist 0% credit card deal that lets you pay a lump sum into your bank account, to use as you like – including to pay off a loan - so you owe the card for it.
For example, new www.Virginmoney.com cardholders can get a 32-month 0% money transfer if they pay just a one-off 1.69% fee of the amount transferred. After the 0% it’s 20.9% rep APR so clear it before then. Full step-by-step help in www.mse.me/moneytransfers.
3 Personal loans – cut big ones to 3.3% or small ones to 0%.
Unlike with credit cards, if you clear a personal loan you can be charged up to two months of interest as an early repayment penalty, so it’s slightly more complex…
STEP 1: Call your current lender and ask it three things: a) What your ‘settlement amount’ is, ie, how much it would cost to pay off your loan today. b) How many monthly repayments you have left. c) The exact amount of your repayments.
STEP 2: Work out what you will pay if you stick with your current loan, by multiplying the remaining months by the repayment amount.
STEP 3: See what rate you could get on borrowing the settlement amount elsewhere.
For under £3,000, the cheapest route is likely to be doing a ‘money transfer’. Above £3,000, a cheap loan wins. Under £5,000 www.Zopa.com is cheapest at 4.6%-6.9% rep APR. For £5,000-£7,500, www.SainsburysBank.co.uk is 4.2% rep APR with a Nectar card (4.3% without). For £7,500-£15,000, Bank.marksandspencer.com is 3.3% rep APR.
Yet, sadly, like all loans these are ‘rep APR’ which means only 51% of accepted customers get the advertised rate, the rest can be charged more. My loan guide eligibility checker at www.mse.me/loanseligibility can tell you which you’re most likely to be accepted for.
STEP 4: Work out if using the new borrowing to clear your current loan is cheaper than just continuing to repay.
4 Shift your overdraft to 0%
Overdrafts are often more costly than credit cards, especially if you bust your limit. There are two solutions. The first is switching to a bank offering a 0% overdraft. www.Firstdirect.com offers you £125 to join it and a £250 0% overdraft (you must pay in income of £1,000/month).
So if your overdraft’s under £375, this pays some off and the rest is interest-free. Also the www.Nationwide.co.uk FlexDirect account has a larger 0%, but only for a year.
Alternatively, in some ways it’s just simpler to pay it off with a money transfer card (see above), especially for larger amounts. You’ll need pass a credit check for both routes.
If you’re struggling to sleep due to your debts
This is very common emotion, especially at this time of year. If you can’t even meet minimum monthly payments, have non-mortgage debts bigger than a year’s salary or have depression or anxiety over it, you’re in what I define as debt crisis.
If so, forget my solutions above and get free, one-on-one debt counselling help. The places I’d suggest are www.Citizens Advice.org.uk, www.StepChange.org or www.NationalDebtline.co.uk. They are there to help, not judge. The most common comment I get afterwards is “I finally got a good night’s sleep.”