Debt Management Tips

Debt Management Tips

by Simon Whaley on 28 Jan, 2011

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.

About the Author

Simon Whaley

Simon Whaley spent eight years working for a high street bank before becoming a freelance writer. His articles have appeared in the UK press, including the Daily Express, and he’s the co-author of The Bluffer’s Guide to Banking (Oval Books, ISBN: 9781903096529)