As millions of Britons will be starting 2008 in the red, we show you how to cure your new year financial hangover
THE DAILY MAIL - 31ST DECEMBER 2007
Whether you owe money on your credit cards, have a mega-mortgage or a personal loan, you can reduce your debts with some skilful juggling.
Card tricks
There is no point having savings and paying huge amounts of interest on your credit card. If you can afford it, use your savings to clear you balance.
This is particularly important for those with cards from the likes of MBNA and Capital One which have doubled interest rates for many borrowers in recent months.
The average debt on a credit card is £1,137, yet borrowers typically have £869 sitting idle in their current accounts and savings of £2,526, according to personal finance website Fool.co.uk. if you’re in this situation you’ll be paying £165 in interest a year at the average rate of 15 per cent while only receiving interest of £66 on savings paying 6 per cent interest – a loss of nearly £100.
David Duo, of Fool.co.uk, says: ‘Saving money before you have paid off your debts is like trying to fill a bath without putting the plug in.’
You can quickly build your savings back up by diverting the money you were using to pay the credit card debt – and interest – into your savings account. Until they’ve been restored, aim to keep card spending to the level you can afford to repay in full each month.
Check out freebies
If you can’t afford to pay off all your credit card debt, then cut your costs. There are two ways to do this: by switching to a 0 per cent card offer or by moving to a low life-of-balance card. However, you’ll need to move to a new card provider to get such a deal.
Interest-free card deals are limited offers, usually for 12 months. When transferring a balance you will have to pay a fee, typically 2.5 per cent of the amount transferred, so moving a £1,100 debt will cost £27.50. the longest offer comes from Virgin Money, which lasts 15 months, but the fee is 2.98 per cent.
The best low interest rate for the life of the balance comes from Citibank at 5.8 per cent with no fee, or 4.9 per cent with a 2.5 per cent fee but it lasts for only five years.
Don’t use your card for further spending because payments come off the cheapest debt first – in this case the balance – while new spending will rack up interest at typically 15 per cent. Only Nationwide, which has a 0 per cent offer lasting ten months on balance transfers with a 2.5 per cent fee, takes payments off the most expensive debt first.
Then apply for a card with a 0 per cent deal on purchases – Halifax has an offer running for 15 months.
Interest on sore cards can go as high as 29.9 per cent, so if you have one either pay it off or transfer the balance to an interest-free credit card.
Dos and don’ts
Avoid using your credit card for expensive cash withdrawals. Don’t forget, cheques issued by card companies and buying foreign currency are usually counted as cash withdrawals too.
Interest is higher than on purchases at 23-24 per cent typically, plus a 2.5 per cent handling fee, with a minimum charge of up to £3. and you have to pay interest on cash withdrawals – even if you pay in full by the date due.
Many card companies have reduced the minimum repayment to 2.5 per cent of the balance. In this way, you pay interest on interest as the debt escalates. With an interest rate of 15 per cent it will take you 15 years to pay off a debt of £1,137 with interest amounting to £855, according to Moneyfacts.
Don’t wait until the due date to pay your credit card bill. Interest is charge until your payment is cleared, so you save by paying earlier.
Rob Kenley of Moneysupermarket.com says: ‘Be careful not to miss a payment as this will affect your credit record, which could mean you can’t get a cheap deal in future.’
If you often use your card abroad, take out one from Nationwide or the Post Office as they don’t charge foreign currency fees.
Don’t let penalty charges add to your debt. If you are regularly caught out by late payment penalties, typically £12 each time, arrange to pay off at least the minimum by direct debit from your bank account each month. But do try to pay more than the minimum whenever it’s possible.
Mortgages
One of the best ways to speed up repayments on your home loan if you have savings and regularly have money in your current account is to take out an offset mortgage.
Rather than earn interest on your spare cash, it is used to offset the interest on your mortgage. someone with a £130,000 mortgage and £20,000 in savings would pay interest only on the balance of £110,000. the interest saved speeds up the rate your mortgage is paid off. For example, on these amounts with a Hinckley & Rugby BS lifetime tracker at 0.24 per cent over base rate (currently 5.74 per cent), you would save £48,284 in interest and pay back a 25-year loan nearly five years early. The arrangement fee is £845.
Intelligent Finance has a three year tracker at 0.14 per cent over base rate (currently 5.64 per cent) with a £1,499 fee.
Pay more
The other way it to overpay your mortgage whenever you can. Most lenders allow you to overpay up to 10 per cent of the mortgage without penalty, according to James Cotton of broker London & Country, though some lenders such as Principality do not allow penalty-free overpayments.
And Mr Cotton warns: ‘Some lenders such as Leeds, Bristol & West and National Counties still calculate interest on an annual basis. So any regular overpayments you make won’t be taken into account until the next annual review date.
‘With these lenders, you’re better off saving and making a single lump sum overpayment.’
By paying just £200 a month extra, you would cut eight years and three months off a 25-eyar mortgage and save £36,108 in interest based on First Direct’s two-year fix at 4.99 per cent (with a £1,498 fee).
Or, if you don’t have the ability to overpay each month, you can reduce the length of your mortgage. For instance, with a two-year tracker from Co-op Bank at 0.01 per cent below base (currently 5.49 per cent with a £999 arrangement fee) you would save £24,817 in interest by cutting your term to 20 years from 25.
Loan arrangers
More than nine out of ten loans quote typical rates. Only those with squeaky clean credit histories will get the low rates quoted. Although you’ll need to shop around for a good rate, don’t do too many comparisons or you’ll damage your credit rating.
Ignore the payment protection insurance offered with your loan, as the premiums can amount to as much as the interest.
If you need payment protection insurance, get a quote from an independent provider such as British Insurance.
If you think you may pay it off early, check there are no early redemption charges.
