FOR many, Christmas is a time for getting together, relaxing, and potentially for relaxing the wallet too. The yucky dark weather arrives, and January’s wages are swallowed in the November and December credit card. It’s not an overly motivational time. Thankfully the Six Nations rugby is just around the corner . . .
Having debt doesn’t feel good and when debt and consumerism does you, rather than you doing it - your autonomy disappears. We all need autonomy.
So, to some great thoughts on reducing your debt, something they should have been teaching at school.
It’s very easy to spend and it’s very easy for that to mount. Eventually it totals an amount on a credit card akin to a ball and chain. At the end of the month, you must make a minimum payment which suits the credit card company just fine, while the debt remains stubborn and crippling. This is common.
The total UK credit card debt stands at over £200 billion. The average credit card rate is just over 23 per cent giving a total credit card interest of over £44 billion a year. This would cover the wage demand for the extra needed for nurses three times over. The government incorrectly stated nurses’ wage demands would drive inflation.
No. Excessive cost of debt IS inflation. Stubborn debt is depressing and takes away our autonomy. It’s very, very easy to slip into it.
Consider transferring to a zero-interest rate credit card. The zero-interest offer can last for 33 months which is a welcome break from the debt interest. That will save you a total of 63.25 per cent interest, which is nearly two thirds of the debt you owe. If you have paid that down off the loan, or, saved that interest, you are much closer to the autonomy we referred to and can then escalate payments to eradicate the last third.
Just watch for any up-front credit card charges in the process. Remember at the end of the term, you will revert to a typical credit card rate close to 23 per cent.
Don’t be hooked either. The American Express preferred rewards card gives you reward points depending on spending in the first six months. After 12 months the APR is a mere 56.6 per cent, which, if you say it quickly, doesn’t sound like much!
Naturally this debt is unsecured, so, replacing it with another unsecured cheaper debt seems like a better option, and the interest you save could be used to repay the actual debt. There are personal loan offers at close to five per cent which are well worth trying for eligibility - offers like the Post office, Santander and the AA for example.
Eligibility is the key here as well as affordability.
Secured loans are available with less scrutiny and checking and higher income multiples of around six to seven times earnings. Even bad credit outside of the last 12 months is often ignored.
If I take the above example for a £10,000 credit card debt, let’s work through the numbers. At 22.2 per cent interest, the person in debt would pay 111 per cent of the debt over the five years and still have the £10,000 debt outstanding. If the borrower took out a loan as above at close to five per cent the saving would be 17.2 per cent per year. 17.2 per cent over five years is £8,600.
And so, by consolidating the loan into a lower interest payment, the interest saving alone would wipe out 86 per cent of the debt. In reality, the debt would have gone long before, as year one would have had 17.2 per cent repaid from the debt, and so on during the coming four years. Therefore, the capital would be reducing as would be the interest payments.
It is often thought that adding a debt to a mortgage or secured loan is not a good idea as you are paying it for longer, and it is attached to the property putting it at risk,(true so take advice) and so borrowers continue to pay completely unaffordable loans for very long periods of time when they could reduce the extortionate interest rates as above and use that saving to eradicate the debt very quickly.
In the first instance, if you have persistent debt (you have paid more in interest, fees and charges than you have off the capital), you should approach the lender and ask about reducing the interest. Your lender knows this and has to help under the terms of persistent debt.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have financial query get in touch by emailing info@wwfp.net or by calling Darren McKeever on 028 6863 2692
