Cut the cost of credit cards, loans, overdrafts and store cards
It’s January, which means Christmas bills are starting to drop through letterboxes. And with many worried about debt following the festive season, our Money Saving Expert Martin Lewis is here with his masterclass in cutting the cost of credit cards, loans, overdrafts and store cards.
There's no one-size-fits-all approach to tackling debt. Yet they all have one thing in common: less interest means more of your repayments clear the actual debt, so you are debt-free quicker. Let me tackle each debt type one at a time.
1. Credit Cards – cut costs to 23 months 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 at less or no interest.
Halifax has launched the longest-ever 23 month 0% debt shift card that has no fee. If you’re not sure you can clear your debt within that time, go longer, the longest 0% deal is also from Halifax at up to 40 months 0% with a 2.95% fee.
Yet don’t just apply in hope, as that hits your credit file. Read Martin’s Top Balance Transfer guide for full best buys and there’s also 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 an eligibility checker, got 36mths 0% and will now pay it off within that time." 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% APR. c) Never spend on the card or worse withdraw cash. They’re not usually at 0%, and cash withdrawals can hit your credit worthiness.
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% APR. But they can be balance transferred just like credit cards, so follow the steps above.
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 could be charged up to two months of interest as an early repayment penalty, so its 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 using a 'money transfer' card - these are a specialist 0% credit cards that let you pay a lump sum in to your bank account, to use as you like – including to pay off a loan - so you owe the card instead. Virgin Money gives 32 months 0% on money transfers if you 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.
Above £3,000, a cheap loan wins, under £5,000 Zopa is cheapest at 4.6%-6.9% rep APR. For£5,000-£7,500 Sainsburys Bank is 4.2% rep APR with a Nectar card (4.3% without). For£7,500-£15,000, HSBC is 3.3% rep APR.
Yet sadly like all loans these are all ‘rep APR’ which means only 51% of accepted customers get the advertised rate, the rest can be charged more. Always do an eligibility check before you apply to see which you’re most likely to be accepted for, and as a very rough rule, the more likely acceptance is, the more likely you are to get the advertised rate.
- STEP 4: Work out if using the new borrowing to clear your current loan is cheaper than just continuing to repay.
The savings can be huge, take this email from Rebecca: "A big thank you. I took out a loan at a terrible rate, £7,500 interest on £15,000. I applied for cheaper loan; interest is around £1,000, so I used it to pay off the previous one saving £6,500.”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, First Direct offers you £125 (more via some comparison sites) 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 theNationwide FlexDirect account gives 0% on your overdraft but only for a year, after that it’s 50p a day.
Alternatively,in some ways it's just simpler to pay it off with a money transfer card as explained 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, you have non-mortgage debts bigger than a year's salary or you 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 Citizens Advice, StepChange or National Debtline. They are there to help, not judge. The most common comment I get afterwards is “I finally got a good night’s sleep”