Borrowing money isn’t necessarily bad, but the way you borrow it can be. The average credit card interest rate is currently around 16%, although some store cards charge higher rates. The amount you pay for borrowing this money each month on a credit card eats into your monthly disposable income, so manage your debt wisely:
- If you have savings, consider using some to reduce your credit card debt. It’s better to use £1,000 to reduce the amount of money you pay 16% on to borrow, than have it in an old savings account earning your 0.1%.
- Consider balance transfers. For a while, 0% interest credit cards disappeared during the credit crunch, but they’re coming back. Look for the longest deal available, currently around 15 months, allowing you to:
- reduce the amount you spend on interest payments or,
- increase the amount your pay off your debt or,
- give you more money left in your pocket each month.
If you’re looking to borrow money for longer than 12 months, a personal loan may be a more effective way to do this, but shop around. Rates for customers with good credit records currently start at around 7%, rising to about 20% for those with poorer credit records. A new European Directive, with effect from 1st February 2011, may change this. Prior to this date, banks could advertise a headline interest rate on personal loans and credit cards to attract new customers, on the condition that at least 66% of all successful applicants could obtain the advertised rate. The new EU Directive means that headline rates only have to be available to at least 51% of successful applicants. Therefore 49% of successful applicants may be offered a higher interest rate than the advertised rate. For potential borrowers with good credit scores, this could be good news. If banks only have to offer advertised rates to 51% of successful applicants, then those rates could drop further because the remaining 49% can be charged higher rates to offset this. Having a good credit history is therefore, vital to saving money when borrowing.