Dealing with debt Personal loan or remortgage could be solution to juggling credit card bills
Financial worries or just looking for better value for money? Consumer champion Fergus Muirhead can help
QI am 58 and work part-time, having partially retired from my previous job. My salary is just under £20,000 and my pension is around £5500 a year. My husband is in his early 50s and works full time with a salary of £20,000. We owe around £20,000 on a number of credit cards, each of which is set up on zero per cent interest at the moment. We pay the minimum to each card every month. We have an offset-type mortgage that’s due to be repaid in six years. The interest rate we are paying is 3.9 per cent. The outstanding balance at the end of last month was around £58,000. Our home is valued at £135,000. We really need guidance on how to tackle our debt. Would it be better to get a personal loan to clear all outstanding debts, or release equity in our home? We have managed to avoid paying interest on our cards – other than balance transfer fees – to various credit card companies to date. However, we don’t want to continue doing this if other options are available to us. Mary Smith, name changed by request A I DON’T think you’ll be alone with the set of circumstances you have described, so many of our readers will sympathise with your position.
As I’ve said before, sometimes the fact that you have taken the time to write to me, or someone like me, is the most positive step that you can take on the way to finding a solution to your debt issues.
I’ll explain the assumptions that I have made before I start to deal with your questions.
I’ve assumed that you are up to date with all of the credit cards that you currently have and you have no arrears with any of them.
I have also assumed that you have no savings that you could use to repay any of your credit card debt right away.
Lastly, I have assumed that you are making the minimum payments to each of your credit cards at the moment because you don’t have spare funds available every month to repay the outstanding balances more quickly.
If these assumptions are incorrect then it may change what follows.
There are a number of options that spring to mind to help you.
You could carry on doing what you are doing and juggle all of your credit card debt around.
The benefit of this is that you will never actually pay any interest on the outstanding balances –
although you will probably be paying transfer fees each time you move the balance around and they can be quite significant.
The problem with this strategy is that it will take you a long time to pay off the balances if you continue to make only the minimum payment every month.
I’m assuming that the minimum payment is probably an average of two per cent which would mean a monthly payment of £400 or so.
On this basis, it will take you 50 months, or just over four years, to repay all of the cards.
This assumes that you will be able to find zero per cent interest for all of that time – something that is not guaranteed – and that you do not add to your credit card debt with any extra spending.
One other option would be to get a personal loan for the whole outstanding amount.
The downside of this is that you will pay more since you will have to pay interest on a loan.
A quick look online shows that a personal loan for £20,000 over four years would cost you £450 per month with an interest rate of 3.3 per cent APR.
This is probably similar to your monthly credit card payments at the moment but the big advantage is that you will clear the debt at the end of four years and won’t be tempted to add to it if you get rid of the cards.
Alternatively you could look to remortgage. Assuming you borrowed £80,000 against a property with a value of £135,000, there are fixed rates available at the moment of 1.6 per cent which would mean a monthly repayment of just over £600 over 12 years.
This would probably be a much lower payment than you are currently making when you add your mortgage and credit cards together, and it might give you a bit of breathing space to get some savings together.
The downside is that you will still be paying off your mortgage when you are 70.