Follow rule of three to ease the debt hangover
LETTERBOXES BECOME dangerous at this time in January, and not just due to trapped fingers. Mail takes on a demonic hue for many awaiting credit card statements with Christmas spending on to land on the doormat. So if your plastic has a festive hangover, don’t ignore it, it’s time to sort it.
There are three key rules to sorting your existing debts: Stop borrowing more. Cut the interest rate. This means your repayments clear the actual debt rather than just profit the lender.
If you’ve more than one debt, prioritise repaying the one with the highest interest rate first – as it’s growing fastest – and just pay the minimums on everything else.
This is where you get a new card(s) that repays debts on existing credit or store cards for you, so you shift the debt and owe it, but at no interest cost. And there’s another ‘rule of three’ here to get the right card.
Don’t apply willy-nilly, first see what you’ll be accepted for. When you apply for a credit card they do a credit check. Yet banks are the type of organisation that’d lend you an umbrella when the sun shines and ask for it back when it rains. So those in most need of cutting their existing debt costs tend to be those who struggle most to be accepted.
Worse still just applying for a card marks your credit file, which has a marginally negative impact, so if you’re rejected being accepted elsewhere gets slightly tougher. To help, use an eligibility calculator, like mine at www.moneysavingexpert. com/BTeligibility.
These let you home in on the right cards, by showing which of the top deals you’re most likely to be accepted for – and they don’t impact your future creditworthiness.
Go for the card with the lowest fee in the time you need. Most balance transfer cards charge a one-off fee on the amount of debt transferred up to 3% (so £30 per £1,000 shifted).
In general the longer the 0% period the higher the fee, so you should aim for the card with the lowest fee but ensuring the 0% period is long enough. So calculate how long you think you’ll take to clear the debt, add a bit for safety, then pick the lowest fee within that time. If you’re not sure play long and go safe.
The longest current 0% card is www.barclaycard.co.uk at ‘up to’ 38 months 0% with a 1.4% fee (19.9% rep APR after). The longest fee-free card is www. halifax.co.uk at ‘up to’ 29 months 0% (19.9% rep APR after). Full best buys at www.mse.me/ balancetransfers.
Watch for ‘up to’ cards. As you’ll note those best buys are ‘up to’ cards. They tend not to say this overtly but you will spot it in the small print. This means, depending on credit score, some who are accepted will get a shorter 0%. Frustratingly there is no way to know this beforehand.
However, in general if you do an eligibility check and the only cards showing up that you have a decent chance are ‘up tos’ then you’re likely to get a shorter 0% with all of them.
The longest non-up to 0% card is www.sainsburysbank.co.uk at 36 months 0% with a 2.89% fee – so if accepted that’s what you get and it also offers a non-up to fee-free option for 28 months 0% (both are 18.9% rep APR after). If you’ve a decent chance of getting those, then they may be worth plumping for. The balance transfer golden rules…
Getting the right cards is only half the job, once you’ve got it you need to ensure you use it the right way. A) ALWAYS clear the debt on the card or transfer again before the 0% ends or you pay the high APR. b) Never miss the minimum monthly repayment or you can lose the 0%. c) Don’t spend or withdraw cash on the card. It usually isn’t at the cheap rate. d) You must usually do the transfer quickly, most cards limits are 60- 90 days to get the 0%.
Can it clear multiple cards? Yes, if the new credit limit’s big enough.
How big will the credit limit be? Lenders tend to look at how much you earn and how much other debt you have. It can be anything from £100 to £25,000. You can usually transfer up to around 90-95% of it.
My credit limit is not big enough. What should I do? Shift as much of your most expensive debt to the card as you can. At least you’ll save on that. When done, follow the process above again to see if you can get a second card for some more. Though each subsequent application can get more difficult as each marks your credit file.
If my best chances of acceptance are only say 30% should I bother applying? That means 3 in 10 of those in your position will get accepted. If cutting this debt’s cost is your priority (i.e. you’re not about to get a mortgage the next week) then you may as well try, one application won’t hurt that much, and this is what you build up your credit score for anyway.
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.
In that case forget what I’ve written above and instead get free, one-on-one debtcounselling help from www. CitizensAdvice.org, www. capuk.org, www.StepChange. org or www.NationalDebtline. co.uk. They are there to help, not judge. The most common thing I hear after is: “I finally got a good night’s sleep”.