We share the secret of saving up to £1000 in interest repayments on your debts.
As you so often hear, we Brits are borrowing more and more, so much so that many of us are now struggling with unmanageable debt. While the media often paints a very negative picture of those that owe it's not always borrowing that’s the problem but instead our attitude to paying it back.
Many of us fall into the trap of spending on high interest credit cards only to return the balance in minimum repayments - a strategy which makes clearing these debts almost impossible, not to mention wracking up a phenomenal amount of interest in the process.
So, to help you make expensive debt a thing of the past, we explain how you could save over £1000 a year, simply by making a few changes to the way you repay…..
Know what you owe
On your quest to becoming debt free it’s essential that you know what you owe. It’s so easy to bury your head in the sand when it comes to debts but tackling your commitments head on, no matter how big or small, really does make it so much easier to wipe the slate clean.
Start by writing a list of all your existing commitments, their respective APRs, borrowing terms (if fixed) and the monthly repayments you are currently making. Arrange them with the most expensive (highest APR) first as this is the order you should begin to pay them off.
Why it pays to tackle your expensive debts first
Because of the huge amount of interest they accumulate, debts with high APRs will cost you most in the long run; this also makes them the hardest to clear on a minimum repayment basis. For this reason when looking to pay off what you owe it’s a really good idea to focus on your most expensive commitments first.
Although it seems a bit contrary to do so, the best approach is to put any spare cash you have each month towards paying off your most expensive debt while making only minimum repayments on all other commitments.
By doing this you’ll be able to pay off your most costly (and therefore fastest growing) debt in a much shorter time than was previously possible. This will not only save you a bundle in expensive interest repayments but will also mean that you have more cash freed up to address your other borrowing.
So, what next?
After you’ve cleared debt #1 it’s time to tackle the second most expensive debt on your list. To clear this second debt as soon as possible you should put the cash you previously used to clear debt #1 (minimum and additional repayments) along with the amount you were previously meeting in minimum repayments towards paying it off.
By continuing with this method as you progress down your list of debts you’ll be able to clear all of your outstandings much more quickly and with much less expense than was previously possible.
How using your savings wisely could make all the difference
Many of us are repaying costly debts while still keeping (or striving to keep) a small nest egg aside for a rainy day. While it seems like a sensible strategy, your money could be put to much better use.
Because banks are never very generous when it comes to interest payments it’s is incredibly likely that the interest owing on your debt is greater than that accumulating in your savings account. For this reason the best course of action is to take your savings and put them towards paying off your debts (tackling the most expensive first remember).
Doing this will not only help to clear a substantial amount of your borrowing (obviously depending on the size of your savings) but will also minimise the overall cost of your debts by reducing the total amount of interest you’ll need to repay.
For example, if you have £1,000 in savings sitting in an account that pays 3.5% in interest you’ll earn roughly £46 a year. However, you’ll actually be paying out £159 a year for that same £1,000 as a debt charged at 15.9%apr. So, instead of keeping both; use your savings to pay off your debts and you’ll be £113 a year better off.
Say bye to bad debt
If you’re currently making high interest repayments on credit or store cards, you’ll be pleased to hear that there is an incredibly simple way for you to cut the cost of this borrowing. Credit cards that offer a 0% introductory bonus on balance transfers can often provide the ideal solution as they give you the opportunity to repay what you owe interest free.
By moving as much of your outstanding debt as possible to one of these cards any repayments you make will go directly towards clearing the balance as, providing you don’t use the card to make any purchases, not a penny more interest will be charged during the offer period.
For example, say you’re currently carrying a balance of £5000 on a credit card that charges 15.9% apr, by simply transferring this balance to a credit card that offers a 0% deal you could save over £570 in interest payments a year.
The best way to take advantage of this interest free opportunity is to avoid resorting to minimum repayments and instead pay off as much as you can reasonably afford each month. This will help you to become debt free even sooner.
If possible you should aim to clear your debts completely by the time the interest free offer expires. However, if you’re unable to do this you should make a note in your diary at least 3 weeks before this date and look to switch your remaining balance to another card with a 0% introductory offer on balance transfers. Why not use our reminder service to make sure you remember to switch in time? Click here for more information.
Its worth noting that most balance transfer credit cards do charge a transfer fee which tends to be a certain percentage of the amount borrowed. This is usually somewhere between 1.5 and 3%. For this reason it pays to go for the card that offers the longest 0% period possible.
It is so important that you switch before the 0% period expires otherwise you’ll once again be racking up hefty interest charges. However, if rate tarting (moving from 0% deal to 0% deal so that you never pay interest on your credit card balances) isn’t for you a life of balance credit card may be a more suitable option. These offer discounted rates for the lifetime of any balances transferred which means you can be confident that you’re not paying over the odds in interest repayments but don’t have to chop and change every 6 or 12 months.
Whether you decide a 0% or life of balance card is right for you the easiest way to compare introductory offers is on best buy tables where all the information you need to make your decision is set out in a clear, easy to understand format makes picking the right card for you simple.
Budget, budget, budget
Putting these ideas into practice will take no time at all but could potentially make a big difference to how quickly you’re able to clear your debts, potentially saving you over £1000* in interest repayments.
Remember, no matter how daunting the prospect, facing your debts head on is always the best solution. Creating a budget can really help to clarify things as one you have a good idea of your monthly income and expenditure you’ll be in a much better position to see what you can really afford to repay. However, if at any stage you feel your debts are becoming unmanageable it pays to get help as soon as possible.
Savings of £1000 achieved by combining the above techniques as follows…
Save £113 by paying off your debts with savings – explained in text.
Save £578 by transferring your credit card balances – explained in text.
Save £497 by paying off your expensive debts first - as follows
If you have 3 debts 1 worth £1000 currently 18.9% apr, 1 worth £5000 at £15.9% and 1 worth £10000 at 6.9% and a total of £500 to spend on paying them off. Assuming a 2.5% repayment minimum it would take you 42 months and £2887 in interest repayments to pay these off on a minimum + equal split of the remaining £100 basis. However if you snowball and meet minimum repayments on 2 while putting the extra £100 towards the cheapest debt until its gone etc it’ll take 37 months and £2390 in interest to become debt free. This leaves you with a saving of £497 in interest.
