Debt is like fire. Used right it’s a useful tool, used wrong and you get burnt. And sadly the UK's collective personal finances are timber dry right now. Non-mortgage borrowing is on the up, and millions are collectively throwing billions away in unnecessarily high interest.
Your aim should be to move all borrowing to 0pc interest. That ensures repayments clear the actual borrowing rather than just servicing the interest, speeding up your debt-free date by years or even decades – provided you don’t borrow more, of course.
It’s not just cards that can be shifted to interest-free. You can do the same with loans and overdrafts too.
Credit cards – shift existing debt to 40 months 0pc
Everyone paying interest on any credit card should check whether they can “balance transfer”.
This is where you get a new card that within the first 60 or 90 days will repay debts on old cards for you, so you owe it instead, but at a cheaper rate. Better still, a current price war means there are some of the best deals we’ve ever seen. These are the three core tips:
1. Choose the lowest fee card in the time you’re sure you can repay. Most cards charge a one-off fee of the amount transferred, but shorter 0pc deals have lower fees. So pick the card with the lowest fee in the time you’re sure you can repay it (add a few months for safety). If you’ve no clue, go long: any extra fee is trivial compared to the interest you’ll pay getting it wrong.
Halifax lets accepted new cardholders shift debt to it for up to 23 months at 0pc with no fee . It also has the longest 0pc deal, 40 months, for a 2.85pc fee (£28.50 per £1,000 shifted). For somewhere in the middle, Virgin Money offers up to 32 months’ 0pc for a low-ish 0.99pc fee (£9.99 per £1,000).
2. Don’t just apply willy-nilly – protect yourself with an “eligibility calculator”. The adage says a bank is an institution that would lend you an umbrella for when the sun shines, but take it back when it rains. And indeed they cherry pick customers via credit scoring. Perversely, the more you need to cut costs the more difficult it is.
Different firms can have radically different attitudes to the same person. Unfortunately though, each application usually puts a “hard search” on your credit file, which means if you don’t get what you need, your chance of acceptance elsewhere is reduced.
Yet a few card providers have “soft search” tools, where you can see your likelihood of acceptance in advance without it marking your file (technically it does put a mark on that you can see but lenders don’t, so there’s no impact). Alternatively my mse.me/eligibilitycalculator shows results for almost all top cards in one, so you can home in on those which are most likely to accept you, thus minimising applications.
3. When a 23 month deal isn’t a 23 month deal. Over the last year we’ve seen a trend in firms offering “up to” 0pc deals, where only 51pc of those who get the card need get the length offered. The rest are offered a shorter period.
Yet there are “if you get it, you get it” cards, so if you’ve high odds of getting these on an eligibility calculator, it means you know exactly what deal you’ll get. The longest is Virgin Money’s 38-month 0pc deal with a 2.49pc fee and the longest no-fee 0pc offer is fromthe AA at 22 months.
Balance transferring can have a huge impact, as Michelle emailed me: “Thanks. I was paying through the nose for £1,700 on Capital One, it’d have taken years to pay it off. Tried your eligibility checker, got 36mths 0pc and will now pay it off within that.” An approximate saving of £980 interest.
Balance transfers aren’t without risks, so follow these golden rules:
a) Repay at least the set monthly minimum or you can lose the special rates.
b) Always clear the card or balance transfer again before the 0pc ends, or rates jump on the cards to at least 18.9pc representative APR or more.
c) Don’t spend on them. Spending’s usually at the standard APR not 0pc.
d) Don’t withdraw cash on them, it’s costly and can hit your credit file.
There are some “cheap for life” balance transfer deals such as Lloyds and Halifax's 6.4pc APR. A few years ago I was a big fan, but now with 0pc deals for well over three years available, the maths shows unless you’re still in debt at least five and possibly 10 years later, these aren’t the cheapest.
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Shift store card debts to 0pc
Store cards are just credit cards you only spend on in one store (or group of stores), but with far costlier interest. For example Debenhams is 24.9pc and Homebase 29.9pc. You can balance transfer store card debts just like credit cards, so follow the information and best buys above for that.
Money Transfers – the hidden weapon to cut loan and overdraft costs
I’m often asked if you can shift loans, overdrafts or other debt onto 0pc credit cards.
The answer is ‘yes’, but only via rare specialist 0pc "money transfer" deals, so I want to explain how these work before moving on.
These are credit cards that let you pay a lump sum into your bank account, to use as you like, so you then owe the card (you must ask to do a money transfer, don’t just withdraw cash). Effectively it’s a credit card loan.
The big firms that commonly offer it are MBNA, Fluid and Virgin Money. Virgin currently has the top deals, with a 32 month 0pc money transfer for a one off fee of 1.69pc, or another card with a longer 36 month deal for a 2.39pc fee. Follow the balance transfer golden rules above for money transfers too.
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Cut loan interest to 0pc
Switching loan isn’t as easy as with credit cards, as you can be charged up to two months interest to pay off a loan early. Yet recently loan rates have plummeted, so many people can win doing this.
STEP 1: Call your current lender and ask it:
a) What your “settlement amount” is, ie, how much it’d cost to pay off your loan today.
b) How many monthly repayments you have left.
c) The exact amount of those repayments.
Then multiply the remaining months by the monthly repayments to see the cost if you stick with your current loan.
STEP 2: Find how much it would cost you to borrow the “settlement amount” elsewhere. If it’s under £3,000 then a money transfer will likely win. Above that, all but the most credit-worthy borrowers will struggle to get a big enough credit limit.
If so, use a personal loan. For up to £4,999 the cheapest is zopa.com at 4.6pc-6.9pc; then up to £7,499 Sainsbury's Bank charges 4.2pc-4.3pc; and for up to £15,000 M&S Bank charges 3.3pc – the cheapest loan rate I’ve ever seen.
Sadly these are all “representative APRs”, meaning only 51pc of accepted applicants need get the rate advertised.
The rest can be charged more, without limit. While a loans eligibility calculator (mse.me/loanseligibility) can’t show the rate you’ll get, anecdotally the higher your acceptance chances, the better your chance of getting the advertised loan.
STEP 3: Calculate if the new borrowing to settle your existing loan is cheaper than continuing to repay it – interest savings of £1,000s are possible for some.
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Cut overdrafts to 0pc
Debit cards can be debt cards too – if you’re in your overdraft it’s often more costly than credit cards, especially if you bust your limit. If you’re overdrawn there are two main options to cutting this.
For smaller overdrafts switch bank. First Direct currently offers £150 via my site MoneySavingExpert.com (£125 direct) to join it right now and a £250, 0pc overdraft (you must have income of £1,000/month going in). Therefore, with a £400 overdraft it’d pay some off and the rest is interest-free.
Nationwide’s 0pc overdraft can be bigger depending on your credit score, but it only lasts 12 months (50p/day after), so use the year to ensure you’re no longer overdrawn.
For larger overdrafts, use a 0pc money transfer credit card to simply pay it off then repay the card instead.
Quick Q & A
Q. I’ve multiple debts. Which should I focus on?
Martin’s Answer: Always deal with the one with the highest APR first, as it’s growing most quickly. And when repaying focus all your spare cash to clear it, paying just the minimums on everything else. Then once it’s repaid, shift to the next costliest.
Q. I’m getting rejected for everything. How do I improve my credit rating?
Martin’s Answer: Big question – I’ve 35 tips to do that here: mse.me/creditrating.
Q. I’m struggling to keep on top of repayments, what should I do?
Martin’s Answer: If you can’t meet your minimum monthly payments, have non-mortgage debts bigger than a year’s salary, or have sleepless nights or depression/anxiety over debt, then forget the solutions above.
Instead get free, one-on-one debt counselling help from Citizens Advice, Christians Against Poverty, Step Change or National Debtline. They are there to help, not judge. The most common thing I hear afterwards is: “I finally got a good night’s sleep.”
• Martin Lewis is a broadcaster and creator of MoneySavingExpert.com. Join the 10 million who get his weekly tips emailed mse.me/tips
