If you owe a lot of money on credit cards and loans you may feel like you’ll never be able to pay it off easily. But, with a few tricks, you can reduce your debts quickly. Find out how to get started.
If you’re really struggling
If you’re behind with things like your mortgage, council tax and energy bills, it’s a different matter (as these are what’s called ‘priority debts’ and arrears should be paid off first). If you don’t know which debts are priority debts or you feel overwhelmed by your debts, contact a debt advice charity, such as Stepchange.
How to pay off your debts double quick
If you owe money on credit and store cards, the best thing to do is to try and switch to a 0% balance transfer deal so you can clear your debt by the time the 0% deal runs out. If you can’t get a 0% (or low interest) balance transfer deal, a personal loan may be a cheaper option.
SAVVY TIP: 0% balance transfer credit card deals change regularly so check the latest offers via SavvyWoman’s best buy tables.
But if you’ve been turned down or the interest rate you’ve been offered is very high (some bank loans charge 15% or more on amounts of less than £2,500) there are two recognised ways that are effective for getting rid of your debts. You can:
1. Prioritise debts by interest rate: Pay off the debt charging the highest interest rate first
2. Prioritise debts by size: Pay off the debt with the smallest balance first
Clearing debt with the highest interest rate first
If you have several debts charging different rates of interest, your money will go furthest if you throw the most you can afford at the debt that’s charging the highest rate of interest and pay the minimum on the rest (without breaking the terms of the agreement). Once you’ve paid that debt off, you move onto the one charging the next highest rate of interest.
Say you owe:
– £1000 on a store card charging 25.9% APR
– £2000 on a credit card charging 18.5% APR
– £500 on a loan charging 12.7% APR
Instead of paying them off equally, you’d make minimum payments on the debts of £2000 and £500, and pay the most you could afford on the £1000 debt. It’s the most effective way of reducing the interest you pay, which means your debts are paid off more quickly.
SAVVY TIP: Try calculator sites such as Card Costs (which is a calculator from the UK Cards Association) to find out how much you could save if you increased the amount you paid.
Paying the minimum
The worst thing to do, with credit card debts, is to only repay the minimum. Some women I’ve spoken to (and I’m sure it applies to men as well) think that they have to be able to pay a lot more every month to make a difference to their credit card debt, but that’s not the case.
According to Card Costs,
If you owe £1,000 on a credit card charging 18% interest and the minimum payment amount is 2.5% of your balance, it would take you over 17 years to clear your debt. Your monthly payment would start at £25 (and would decrease as you cleared your debt).
- If you can pay an extra £10 a month: you’d reduce the repayment time from 17 years to a little over five years. That’s a reduction of ten years just by finding a tenner a month!
If you can pay an extra £25 a month: you’d reduce the repayment time from 17 years to around two and a half years.
SAVVY TIP: If you have a credit card bill that you can’t pay off in full, don’t assume that you need to have a lot of spare cash to make a difference. In this case, every little really does help.
Calculating the interest you’re paying
In most cases, it should be easy to work out how much interest you’re being charged, as it should be on the loan agreement or credit card statement.
– Credit cards may show a monthly interest rate on statements.
– If that’s the case with your card, look at the summary box on the back of the credit card statement to find out how much the APR is.
– This is the figure you need to compare how much interest you are being charged by different credit providers.
SAVVY TIP: If you owe money on a credit card charging several different rates of interest (perhaps because you have done a balance transfer to a low interest rate deal, have used your card for purchases and possibly also cash withdrawal), it won’t be so easy to work out how much interest you’re being charged. Try and work out an average or estimate the rate.
Some psychologists say that paying off debt is more about finding the best way to stay motivated, rather than the most efficient results, so I’m including another method of debt repayment. It’s not the most effective use of your money, but it may help you stay on track.
– Instead of paying off the loan that charges the most interest, you pay the maximum you can afford on the smallest debt and the minimum on the rest.
The idea is that you’ll feel inspired by the fact you’ve cleared one debt in full and will want to carry on. If you think this will work for you when the ‘paying most to the debt charging the highest rate’ method might not, then try it.
SAVVY TIP: You will pay more interest this way and it will take longer to clear your debts, but don’t give yourself a hard time for choosing this method. What’s important is that you’re reducing your debts.
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