Use a balance-transfer credit card to clear your debts
Don’t pay interest on your post-Christmas debt – get a balance-transfer credit card instead. Ruth Jackson-Kirby looks at what's on offer.
In the run up to Christmas many of us flex our credit cards to pay for everything from presents to festive food. As a result, consumer debt soars. But interest-free credit card deals are booming, making it a great time to take control of what you owe.
The average UK household had around £2,085 sitting in credit cards in October, according to The Money Charity. That is likely to have risen substantially over the past month thanks to Christmas shopping. MoneyFacts puts the average interest rate on a credit card at 26.2% APR, meaning your credit card could be prove to be a very expensive drain on your finances.
The good news is it is very easy to dramatically slash your credit card debts and clear them completely in a relatively short space of time. Here’s how.
Know what you owe
Start by getting an accurate picture of what you owe. Look at all your credit card balances, as well as any overdrafts. Once you know exactly how much debt you have you can work out how to repay it.
Now look at your savings and current account balances. Can you afford to clear your credit card in one lump payment? This is a great idea if it won’t eat into your emergency savings. Considering that the average instant-access savings interest rate is a measly 0.19%, according to MoneyFacts, you will be much better off financially if you pay off your credit card debt quickly rather than tucking away money into your savings account.
Stop paying interest
If you can’t manage to clear your credit card debt at once, concentrate on making that debt as cheap as possible. All you need to do is find the best balance-transfer credit card. These are a type of low-interest credit card that allow you to shift debts over from other credit cards. Most offer an interest-free period of many months or even years, stopping your debt from growing while you pay it off.
An interest-free balance transfer card can make a huge impact on what your debts cost you. Let’s say you have £2,085 of debt on a card charging 26.2%APR. If you only made a minimum payment each month of 3% it would take you over five years to clear your debt and cost £1,683.28 in interest. Even if you paid off £200 a month, you’d still pay £306.64 in interest.
However, if you shifted that debt onto an interest-free balance transfer card you could completely eradicate all those interest charges. All you may have to pay is a balance transfer fee – that’s a small payment for each debt you move onto the card. Luckily, these fees have been falling – they are now cheaper than they have been since 2006, according to MoneyFacts.
“In the run-up to the festive season it seems credit card providers have made overhauls to their interest-free balance transfer offers,” says Rachel Springall, finance expert at MoneyFacts. “This could well be perfectly timed for borrowers looking to consolidate their debts and have more time to pay off their balance without incurring interest.”
Don’t take longer than you need
There are currently 68 balance-transfer credit card deals on the market. Finding the right one for you is simple: just weigh up how long you need to clear your debt against the balance-transfer fee. The longest interest-free deals tend to have the highest fees. So don’t opt for a card that gives you years with no interest – often the top result on the best-buy tables – if you can pay it off in a few months.
For example, the longest interest-free offer is from Virgin Money at 35 months, but it comes with a 2.94% balance transfer fee. That means the average £2,085 debt moved to that card would cost £61.99. It’s great to get almost three years interest-free to clear your debt, but if you don’t need that long consider a shorter-interest free period with a lower fee. If you can repay your full balance in less than two years, Sainsbury’s Bank has a balance transfer card with 21 months interest-free and no balance transfer fee, so it could cost you absolutely nothing.
Just remember to pay off the card in the interest-free period or move your card before it ends. Most cards have high interest rates once the initial deal ends.