Figures published this week by National Debtline ran by the Money Advice Trust show that an estimated 7.9milion of us are expected to fall behind with finances this month as the inevitable Christmas spend kicks in. Monday 15th January, so called “Blue Monday” is said to be the most depressing day of the year, as it is when the majority of the credit card bills hit.
So what are the options to ensure that you are not as blue on the 15th Jan? Well there are a few options that can help you minimise your financial hangover, and furthermore January is a time of year when most of us think about home improvements.
- Ensure that you are on the best overdraft deal. If you regularly use your overdraft, make sure you are getting a good deal.
If you are not, think about switching. Overdrafts are fundamentally designed for short term or “emergency” borrowing; however research from the debt charity Stepchange shows that more than 2million of us are constantly overdrawn.
Overdraft fees vary massively, some banks work on a daily fee some on monthly, some on an interest basis and some use all three, so make sure you know which one your account uses, and if you are not happy with it, then switch. Most banks have overdraft type calculators on their websites so you can compare the information fairly easily.
Many banks offer deals that encourage you to switch. Nationwide’s FlexDirect account promotes no fees on arranged overdrafts for the first 12 months, and First Directs 1st Account offers a £100 switching payment as well as a free £250 overdraft.
But what about those that are constantly overdrawn, can they still switch, would a new bank want then? Payment body BACS which run the current account switch scheme says that yes you can. However you will obviously need to agree any overdraft limits with your new bank or building society, or indeed get help from your new bank to perhaps clear any existing overdraft with a previous bank.
- Cut your credit card costs. Switching to better deals could save hundreds even thousands of pounds worth of interest.
This is a very competitive market and the best transfer deals offer 0% interest for up to 38 months, but you must fit the rather strict criteria. Clearly the main benefit of a 0% deal is that all your repayments go to clearing off the balance, thus reducing the overall debt quicker. However, you must ensure that you keep up with repayments, and remember that there is often a balance transfer fee involved from 1-4% of the outstanding balance usually.
Barclaycard is currently offering 0% interest for 38 months on balance transfers, where the fee is 1.4% which is £14 per £1,000 transferred. Similarly, MBNA are offering 0% for up to 38 months, with a 1.44% fee.
If the transfer fee is pitting your off, then Halifax are currently offering a fee free deal which offers 0% for up to 29 months.
Money Saving Expert guru Martin Lewis says you should go for the lowest fee in the time you are sure you can repay. “Calculate how long you think you’ll take to clear the debt, add a bit for safety, then pick the lowest fee within that time,” he suggests.
Andrew Hagger chief finance commentator of financial website MoneyComms.co.uk says that if someone switched £4,000 to the Barclaycard deal, their only cost would be the £56 initial transfer fee (that is, 1.4% of £4,000), provided they clear the balance within the 38-month period. If, instead of moving the debt, they kept it on their current credit card, which we will assume has an interest rate of 19%, and paid it off in equal instalments over 38 months, they would pay £1,241 in interest. So by switching cards that individual has achieved a net saving of £1,185.
Hagger says “If you are financially disciplined and have a decent credit record, this is a smart way to tackle your card debt,” However, again you must ensure that you keep up with repayments as even one missed or late payment usually means that your 0% promotional deal will end.
- Debt consolidation via an unsecured loan may also be another money saving option.
If you are juggling many sources of credit, and paying various levels of interest over several payments, it can become confusing and expensive. Unsecured loans may help you save money by consolidating all existing debts into one and so reducing your monthly payments.
Unsecured personal loan rates on £10,000 are now an average 4.6%, borrowed over five years, but there are best-buy deals available at under 3% but the criteria to obtain these is very strict.
Rachel Springall from data website Moneyfacts.co.uk says there are pros and cons to using an unsecured loan to consolidate debts. “Borrowers must be sure to keep up with the set repayment each month. However, a loan could be perfect for those who can’t resist the enticement of using more of their credit card limit and who need a sensible product to pay back their debt over a fixed term.”
- For those of us that are planning to have work done again an unsecured loan may be your best option, assuming that you can access the most competitive rates.
The TSBs current rates start from as little as just 2.9APR for loans between £7,500-£25,000 over a 1-5 year period, with Sainsbury’s bank starting at 3%APR.
So, as an example, someone who borrowed £7,500 via a TSB personal loan over five years in order to finance a new bathroom would repay £134.46 a month, assuming they were eligible for its 2.9% rate. In this example, the total repayable is £8,067, which is just over £500 of interest, which is a very good deal. Equally people often turn to remortgaging as a source of cash when they are thinking bout home improvements. So many mortgage related options may be worth considering, although most contain costs and fees. However if you are coming to the end of your existing mortgage deal, it could be the right time to find a better deal for your requirements.