Martin Lewis' guide to beating January debt
January's credit card bills are flopping through letter boxes nationwide, often swelled after Christmas spending. Debt is far more than just a financial issue, it can affect every element of someone's life - even relationships, family and mental health. So don't let it fester, it needs dealing with. Martin Lewis joins us with his top tips to help and step-by-step guide to help you become debt-free.
Step 1: Stop borrowing
* It sounds obvious, but there's no point trying to sort out your existing debts if you keep adding to them. The most important thing to do is ensure you're not borrowing more.
* The way to start doing this is by doing a budget which adds up whether you spend more than you earn, so you can see where the cash is going. Afterwards, give yourself a money makeover to see where you can cut bills and then, if needed, you can cut back.
Step 2: Cut your interest rates
* The less interest you pay, the more of your repayments go towards clearing the actual debt, not just servicing it. Here's how to cut your credit costs:
- Credit Cards: A balance transfer is when you get a new card that pays off the debts on old cards for you, so you owe the new card the money instead, but hopefully at a cheaper interest rate, provided you've a good credit score.
* We've got the best ever deals available right now but the problem is whether you'll be accepted. The only way to know for sure is to apply, which marks your credit score - and thus means if you are rejected, getting another one is more difficult.
Top deals include: Accepted newcomers can shift debt to the longest ever Barclaycard 35 month 0% (2.49% one-off fee). Next longest is the Halifax 34 month 0% (2.8% fee) or if you can clear it sooner, go for the Santander 15 month 0% no fee card or the Lloyds 28 month 0% (1.5% fee) card.
The golden rules:
A) Never miss repayments or you can lose the 0% deal.
B) Ensure you clear the debt before the 0% ends or rates jump to 18.9% representative APR.
C) Never withdraw cash or spend on these cards as it isn't at the cheap rate.
- Loans: Can you cut the cost of existing loans? It's complex, as you need to factor in that most loans charge up to two months' interest to repay them early.
* Who should try? Those who can get a substantially lower APR loan (eg, more than a fifth off, so from 10% to 8%), and have a while left to repay. A representative APR means sadly only 51% of those accepted must get that rate - the rest could pay more.
* What are the cheapest loans?
Borrow between £7,500 - £15,000 over one to five years and M&S Bank is now just 3.6% representative APR (apply by 17 February). Otherwise, if you have/get its free Nectar card, Sainsbury's Bank has also dropped its rate to 3.6% rep APR (for one to three years). Cheapest £5,000-£7,499: Cahoot and M&S Bank both offer 4.9% rep APR over one to five years.
Cheapest £2,500-£4,999: Hitachi is the easy winner of standard loans at 8% rep APR for £2,500-£2,999 (next cheapest is 14.9%) and 7.8% rep APR for £3,000-£4,999 if you borrow for two to five years, though cheaper rates can be available via peer-to-peer lenders Zopa and Ratesetter.
Step 3: Pay off the highest rate debts first
* Far too many people simply split the amount they repay on various debts - this is a bad tactic.
* List all your debts in order of interest, then focus all of your spare cash on clearing the debt with the highest interest rate first, for the simple reason that it costs you most. That means you should pay just the minimum repayment on all other lower interest rate debts. Once the most expensive is repaid, shift focus to the next highest rate card and continue until you're debt free.
Step 4: If in crisis see a non-profit debt counselling agency
* If none of the above work, and you're struggling to pay even the basic outgoings (mortgage/rent, energy bills, credit card minimums), or your debts (excluding mortgage) are bigger than a year's after-tax income, you are getting close to a debt crisis.
* This isn't something to panic about, but it is something to act on soon. Yet let me say, no matter how black it feels I've NOT ONCE seen an unsolvable debt case. It mightn't be easy or quick, but it can be done. The best thing to do is book a one-on-one session with a debt counsellor at a non-profit, non-judgmental, free debt service such as Citizens Advice, StepChange or National Debt Helpline.
* They'll work through your debts with you to devise a solution. Their most common tool is a debt management plan, where they negotiate with your creditors to decide a set monthly payment. For more severe debts, options include debt relief orders, individual voluntary arrangements or bankruptcy, but never try these without advice first.