The second of Debt Camel‘s 2015 “Take Control of Debt”resolutions is to check out your interest rates and see how you can reduce them. This is a great time to be doing this as credit card balance transfer offers are both longer and have lower fees than ever . If you can cut your interest it will really speed up your debt repayments – but first you need to get all the information at your finger tips so you know what to prioritise.
Make a list of all your debts
Not just the credit card and loan that are worrying you the most, but also your overdraft(s), any catalogues, any cards that are at 0% at present, HP on the car, your mortgage and any secured loans, any council tax arrears, parking ticket fines, benefits overpayments etc
For each of them you want to know:
- what the amount currently owing is; and
- what the current interest rate is .
The amount owed can be from a statement in the last month or so. If you only get an annual statement for a loan, you may be able to work out how much it has fallen since the last one, but if you are unsure phone them up and ask. Also check on tax credit overpayments and rent arrears – if these are being deducted from your benefits you need to know when the deductions are going to end.
If the interest rate you see looks surprisingly low – 2.1% on a credit card say – then it is probably a monthly interest rate. Convert it to annual using this calculator.
Check your credit rating
The better your credit rating is, the more likely you are to get a 0% balance transfer card or a loan at a good rate of interest, so you need to find out what your credit rating is.
There are 3 credit reference agencies. With Experian and Equifax, you can get your report for free by signing up to their paid service and cancelling it within 30 days. If you suspect you might forget to do this, it would be better to pay £2 and get a single report – they don’t promote these as they are much keener on you signing up for their expensive ongoing service, so here are the links for Experian and Equifax. Callcredit lets you sign up to their Noddle service for free – don’t bother with their premium service.
Work out your interest rate priorities
You now have a complete list of your debts, so you can see what your priorities are. Don’t be unrealistic. The idea of a single loan to consolidate £18,000 of credit card debt might sound very enticing, but no-one is going to lend you that much unsecured.
If you have a lot of debt that needs sorting, you may have to look for several different options and spread them over time. For example, get a loan for 5k now and clear your highest rate credit card and close it. When you phone up to close it, ask if they could give you a 0% deal instead – it’s always worth a try!
Beware the debt consolidation trap!
Always close down cards that you have cleared. The only exception is to keep ONE card for emergencies – hide it away! If you don’t, it’s all to easy to run up more credit card debt and you will be worse off. Literally hundreds of thousands of people have done this and regretted it – don’t be one of them.
Read up on the other pitfalls of 0% cards and consolidation – be careful you don’t get into more of a mess than you at present. Always set up a direct debt for repayments because just one missed can mean you lose the 0% deal completely.
Is unused credit good or bad?
Different lenders can apply different rules and these are not published, so there is no simple answer. It’s good to have some credit available as being close to maxing out your cards may look like a danger signal to a potential lender.
But lenders also look at the total amount of credit you have available compared to your income and if that is large, even if unused, they will not want to lend you more. This can be very frustrating if you actually want the loan to consolidate debt and you plan to close the cards after clearing them.
When a card balance is getting low but there is a very high credit limit, ask for the limit to be reduced. If you are down to say £1,500 remaining and the balance is £10,000 then cutting the credit limit to say £5,000 may mean that you are more likely to get a 0% offer or a loan at a good rate.
Look for soft searches
Applying for credit and being rejected usually leaves a ‘search mark’ on your credit file. Several of these in quick succession will harm your credit rating and mean your next application is even more likely to be declined.
However ‘soft searches’ won’t harm your credit rating. Nationwide allow you to “pre-apply” for a loan and find out what rate you would be offered without it leaving a mark on your credit file. MoneySavingExpert lets you check to see if you are likely to be accepted for 0% deals.