Now that the horror of the first credit card bill has passed post Christmas and we are now safely into February, it is a good time to have a look at how you can improve your debt position.
January is of course the month when the Christmas credit card bill lands which usually contains extra spending over the Christmas period on turkeys, tinsel and toys.
However, it must be noted that Brits have long been piling on the debt. Even before the full cost of Christmas arrived, unsecured consumer lending grew over 9% in the 12 months to November. Then things really accelerated with Black Friday and Cyber Monday etc and then the lure of the Christmas sales and the consumer fest that is Christmas itself.
So, what is the best option for an individual and what is a “debt detox”?
Cut credit card costs
Many people and households with existing credit and store card debt could save hundreds of pounds or even more by transferring balances to another provider with a better rate of interest.
This is a highly competitive market and balance transfer deals offering 0% interest can last over 3 years or longer, allowing you to restructure your debt over a longer period and make smaller payments.
Of course, a good credit rating is required to be able to transfer debt and this is one of the reasons why a good credit rating is so highly prized.
One trap that consumers often fall into is that accumulated debt from credit cards and store cards is transferred to a 0% balance card but then the debtor starts spending again on the cards that have just been cleared of debt. This perpetuates a vicious cycle of debt which becomes increasingly difficult to break out of. Self discipline is required to pay back the 0% interest card not incur spending on any other cards. One tip, if financially possible, would be to structure the payments over the 0% interest period to ensure the card is paid off at the end of the 0% interest term. For example, if the credit card debt that is transferred is £3,800 and the 0% credit card term is 38 months then simply set up a direct debt for £100 per calendar month and the debt will be cleared within that time-frame.
This is a variation of the above strategy. Interest rates for unsecured personal loans are still at an all time low and, (again as long as credit ratings permit) costly debts such as store cards and credit cards could be consolidated into one far cheaper personal loan. The advantage here is that two savings could be made in paying the lower interest rate of a personal loan and there is a structured monthly plan to get rid of the debt.
Again, the difficulty would be maintaining payments on the personal loan while resisting the temptation, or some times need, to start spending on the clear credit cards.
Get a better overdraft deal
If you regularly live inside your overdraft, make sure you are getting the best deal possible. If you aren’t, think about switching.
Overdrafts were never designed for long term debt, their use is as short term borrowing. The difficulty lies when you are permanently in the red with regard to your overdraft. This debt is usually very costly.
Authorised overdraft costs vary hugely, some banks impose daily fees and others impose monthly charges. Some charge interest on the amount owed and others use a combination of all three. Very confusing!
The overdraft costs have been scrutinised by regulators and thankfully things are starting to improve and simplify. For example, Halifax customers now simply pay a flat fee of 1p a day for every £7 that is borrowed above their limit.
Many banks now have overdraft calculators on their websites where you can discover how much this debt costs.
Switching bank accounts is also an option to look at with some new accounts offering interest free overdrafts.
Regardless of how your debt is restructured, always the best option is to be aware of what you’re spending and budget for every eventuality, Christmas, summer holiday, car/washing machine/hoover blowing up!
The other golden rule is to seek advice as soon as possible. I am always available to answer any queries about debt and look at the best option for someone who is insolvent if things have gone that far. Bankruptcy, Individual Voluntary Arrangements (IVAs) or other insolvency procedures can always be advised on. Alternatively, I am happy to discuss money management or different ways debt can be dealt with prior to an individual becoming insolvent. Call 0845 287 0939 or contact us online.