Cut your credit debts before rules tighten
AN IMPORTANT warning for anyone with an existing credit card, loan or overdrafts. Check if you can cut its costs now, as the Bank of England is considering making that tougher.
There has been a huge increase in personal borrowing over the last year. The Bank of England is concerned and has warned this could lead to people defaulting and a bubble similar to that which caused the credit crunch a decade ago.
It has mooted the idea of tightening lending criteria to make it more difficult for those who shouldn’t borrow to get credit. I suspect that’d mean tougher credit scoring and affordability criteria (you can check your credit and affordability score for free at www.creditclub.com). This is sensible, but those who just want to cut existing debt costs may fall foul of this too.
While nothing’s certain, with rates across the board at, or near, all-time lows (part of the problem), if you’ve existing debt it’s a sensible idea to see if you’re on the cheapest possible deal…
This is all about balance transfer deals, where you get a new card to repay debts on old cards for you, so you owe it instead but at a cheaper rate. That’ll mean more of your repayments clear the actual debt, rather than just servicing the interest.
The difficulty of course is being accepted. Yet if you use my balance transfer eligibility checker at www.mse.me/ balancetransfereligibility it shows you which top deals are most likely to accept you without any impact on your credit file.
Most cards charge a one-off fee, for transferring a balance. If you have a decent chance of many 0 per cent cards pick the lowest fee in the time you’re sure you can repay. For example, www.halifax.co.uk is offering up to 29mths 0 per cent fee free, while www.virginmoney.co.uk gives 41mths 0 per cent, but then you pay a 3 per cent fee. If you’re not sure how long it’ll take you – go long for safety.
The impact can be huge, as Kelly told me: “Legend. Used the eligibility calc, got 35mths 0 per cent and shifted £11,000 from 29.9 per cent. Shocked by the savings.” That’s £4,900 interest saved if it’s cleared within the 35mths.
Yet the job isn’t over once you’ve done a transfer. Ensure you aim to clear the card before the 0 per cent ends or the rates typically rise to around 20 per cent APR. Never miss the minimum monthly repayment or you can lose the 0 per cent deal and don’t spend or withdraw cash on the card as it isn’t usually at the cheap rate.
Shift it to 0 per cent.If you’re overdrawn, debit cards are debt cards too, and often they’re worse than credit cards. A constant £200 overdraft could cost you £365/yr; bust the limit and it can be worse...
a) Overdraft under £350, get paid £100 to grab a 0 per cent overdraft. Switch to www. firstdirect.com and you get a £250 0 per cent overdraft and a free £100. Use the free cash to reduce your overdraft and you’ve got time to pay the rest down. You must have income of £1,000/ mth paid into it (or there’s a £10/ mth fee).
b) A (potentially) larger 0 per cent overdraft for 12 mths. Switch to www. nationwide.co.uk FlexDirect and get a year’s 0 per cent overdraft (50p/day after). The limit depends on your credit score, but it can be large as Matt tweeted me a while back: “@ MartinSLewis Matched my old one – £1,200. Implied I could have asked for more but the point was I wanted to pay [it] off.”
c) Shift it to a special 0 per cent money transfer card. This pays money into your bank to clear the overdraft, so you owe the card instead. Up to 41 mths 0 per cent is available for a fee. Its complex though, so see the full guide at www.mse.me/ moneytransfers.
3. Already got a loan? You may be able to make it cheaper. Unlike credit cards, clear a personal loan and you could be charged an early repayment penalty of up to two months’ interest. Yet loan rates are now so low, it may be worth getting a new one to pay off the existing one including penalties.
Becki tried it: “Big thanks. Took a loan at a terrible rate – £7,500 interest on £15,000. Applied for a cheaper loan & I’m now saving £6,500.”
Here’s the key steps…
a) How many repayments you have left and how much they are. Multiply the two together to work out what you’ll pay if you stick with your current loan. b) What your ‘settlement amount’ is, ie, how much it costs to clear it today. Step 2 See how much you can borrow the ‘settlement amount’ for.
For under £5,000 www. zopa.com tends to be cheapest at 5 per cent to 9.9 per cent representative APR. For larger www.tsb.co.uk is 3.3 per cent representative APR up to £7,500 and above that www.tsb.co.uk is 2.8 per cent representative APR. Though again what counts is whether you’ll be accepted, you can use the www.mse.me/ loanscalc to see your chances of getting a cheap deal.
Don’t extend the term of the loan if you do this, try to repay it just as quickly, if not spreading the loan will result in more costs. Step 3 Work out which is cheaper. Now work out how much it will cost you if you continue to repay the existing loan, and compare it to the cost of repaying a new loan. To help there’s a calculator at www.mse.me/ personalloans#calc.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 12 million people who get his free Money Tips weekly email, go to www.moneysavingexpert. com/latesttip.