A reader has a very common situation:
I have £12,000 of debt on a couple of credit cards and a catalogue. Is a loan the best way to sort this out as soon as possible?
It’s not possible to answer that without a lot more details… but let’s explore the options and see what makes some ways better for some people.
Why do you want to do this?
There are three main reasons:
1) You are fed up with the debt and want it cleared so you can save money.
That’s great – the rest of this article is for you!
2) You want to cut your monthly repayments so life is a bit easier.
That’s OK, but be honest about how bad your situation is – can you really stop spending on the cards? If you can’t then your debt is going up every month and it’s better to get debt advice now.
3) You can’t afford the monthly repayments.
This is a serious debt problem and most of the suggestions here aren’t going to work. 0% balance transfer cards let you clear debt faster, but the monthly repayments are just as high, so it won’t help you. And any consolidation loan you could get would probably be expensive – you can’t consolidate debt when you are already in a big mess…
Instead you need to look at your debt choices – read What to do if you can’t pay a debt this month .
Get the facts
What is the interest rate on each of your debts? If it sounds surprisingly low then it may be a monthly rate and you need to convert it to an annual one. There is a calculator here.
If you have any catalogue purchases on Buy Now Pay Later deals, find out what the interest rate will be when the deal ends, unless you can definitely clear it before then.
And what is your credit score like? With a good credit rating you have a lot more options for speeding up the debt repayments.
Have you stopped using the card?
This is the essential first step to trying to pay off the balance or get it way down. If you are still using the card, it’s like trying to fill a bath with the plug not in…
So leave the card at home. And if it is on any apps such as Amazon or Paypal, take it off and substitute your debit card instead.
Good credit rating – can you get a 0% balance transfer?
With a good credit rating this should be your first thought. These 0% deals aren’t a permanent solution to debt – and since the pandemic they are less good and harder to get. But if you can get one, then switching to paying no interest on some or all of your debts means you can clear it much faster.
MoneySavingExpert has a good guide to 0% balance transfers that covers what you need to remember and has an eligibility checker. It’s important you don’t just apply for a great sounding offer and then get rejected – that just makes the next application a bit harder.
If you can’t get an offer big enough for all of your debts, transfer as much high interest debt as possible.
0% on purchases card – avoid
Perhaps you are thinking about getting a 0% on purchases credit card. Could you put your everyday shopping and bills on that and pay off more from your current cards? This can work in theory, but:
- after a year or two, your other debts have gone down and you have a large balance on the new card which has reached the end of its 0% period;
- you may have spent more on the new card than you would have done by paying in cash or on your debit card.
You have to be a disciplined demon budgeter to make this work in practice.
When you are debt-free, these deals can be a good way to spread the cost of a large item. But when you have other debts they are a complication that isn’t worth it.
A consolidation loan – perhaps… but they can be dangerous
A cheap loan may sound great. But if you are a big financial mess than it may be hard to get one.
Never consolidate unless the loan is really cheap, not just less than your cards are charging. A loan of 18% may sound cheaper but it’s inflexible and it may kill you! And consolidating payday loan debt to a guarantor loan is madness.
And never get a secured loan to pay off credit card debt unless you have taken good debt advice about your other options first. If your money problems get worse, there are ways to tackle unsecured debt but a secured loan puts your house at risk.
Consolidation loans, even cheap ones, can go badly wrong for too many people. See Avoid these five debt consolidation errors if you want to be safe.
If 0% deals and a cheap loan won’t work…
Often you can’t move all your current debt onto low or no interest rates. But after another six months or a year, your debts will have reduced and your credit rating may have improved if you made all the payments on time, so it’s worth looking again.
In the meanwhile, try to pay more than the minimums to all your debts. And throw the most money at the debt with the highest interest rate – the name for this is snowballing and it’s the fastest way to repay debt and end up with a great credit rating.
Also see if you can cut any of your expenses – that works for everyone, good credit rating or not! Here are some articles that may help:
7 nearly painless steps to cut spending
How to end your car finance early
How far can you cut back? Be sensible!
Suzanna Walker says
Loans only work if three points apply 1. You need to get a better rate of interest on the loan than the credit cards and 2. if you do that you should cut up the cards. If you don’t you are then tempted to re use the cards to their maximum amount and your situation is then worse. 3. If you do clear the cards then ask the two credit card providers to reduce your credit level. Don’t be tempted to get rid of one as spreading your debt is better that owing one creditor a larger amount. It gives the creditor more power legally if you ever had a dire situation like losing your job.
As Sara says you can do balance transfer but that tends to only work in the short term. Plus it does’nt improve your credit rating as you still have a large sum of unsecured debt against your earning capacity and you have exceeded 40% of the card credit level which knocks points off your rating. Think carefully consider all options and don’t use credit cards to supplement your lifestyle.
Tim says
More finance&banks companies seem now to agree payment plans and keep a customer.
A tip I would give based on my experience in the industry is always maintain a dialogue with your creditor and most will be sympathetic to reason .Totally ignoring creditors makes it a lot harder further down the line in my opinion
Jenny says
Hi
I have a good credit rating 888 and £7k on a credit card . I’m trying to balance transfer some over but the most I get offered is £2000? Any suggestions or advice ?
Many thanks
Sara (Debt Camel) says
Probably take the 2k! It’s unlikely you are going to get offered 7k.
Liam says
Hi Sara,
Not sure what thread my question should be on.
We’re having to move out and will now have to pay more rent wherever we move to by around £110pm, so need to free up funds.
I have taken out a loan for £3.5k @ 59% apr over 3 years to consolidate our loans and reduce our outgoings on a monthly basis. I was just wondering whether it would be better to take out a loan of £5k instead (£1.5k more) over 5 years (keeping the monthly payment the same as at £3.5k) to clear down her high interest credit card 59%apr which has a balance of £1800 (which we could clear with the £5k loan). This would reduce monthly outgoings by another £90 which can help clear down a couple of her other credit cards in s short space of time to bring them to 25% utilisation and improving my wife’s credit score. I’m fairly confident my wife could get a loan at a much better rate much sooner than I will, due to her previous credit history.
Does it make sense to take out this loan for £5k over 5 years to help speed up the process of improving my wife’s credit score and our outgoings, also with a view to getting a much better rate on a loan further down the line to clear this £5k loan?
I hope that’s made sense.
I have a health condition and if I ever have to leave work, we need to be in a position where we aren’t going to be in a really bad situation, as we did when I first had it 4 years ago.
Thank you
Weatherman says
Hi Liam
All makes sense! My immediate thought is – you’ve clearly got a lot of debts that are high-interest and not easy to repay. And you being able to repay is conditional on your health staying OK. Have you considered instead a formal solution, like a DRO or bankruptcy, which would write off your debts and get them out from under you? National Debtline can give you free advice & information about these (and at the end of it, whether you go for one of them is still entirely up to you): 0808 808 4000
It also slightly worries me that you’re thinking about getting another loan to repay a loan if you take the £5k loan option. Generally, paying debt with debt is a sign that things aren’t sustainable (so all the more reason to speak to National Debtline!).
As for the options you’ve outlined, it seems like both cases the APR is the same (59% APR on both the loan and the main credit card), you would pay less altogether per month with the £5k loan option (albeit for longer). There’s not really a definite answer as to which is better in that situation, it’s your call!
But either option is ALL dependent on you being able to keep up with the payments for a long period of time. I’d really, really recommend you get some debt advice before taking any more decisions, as there might well be a way to just sort out your debts once and for all.
Liam Attrill says
Hi Weatherman,
No, DRO/Bankruptcy is not an option. I’ve worked ever so hard to get to this point. Our situation has vastly improved and we technically don’t need to take out a further loan but it does help us do what we need to. Repayments aren’t a problem and to be honest, I might as well have gone down that route several years ago but mine/our credit situation is a lot healthier now than what it was and it wouldn’t make sense to take a massive step backwards in my opinion. we’ve gone from high interest provident/payday loans etc to being offered more and more acceptable rate loans, so we are reducing our debts and credit exposure. The better the offer with apr, I take and reduce the term/amount. I’m sure we will get even better offers as time goes on. And sorry, the £5k loan apr would be 49% as well.
My thought was the credit card apr is 59% however, all we are doing is clearing the interest pretty much each month whereas, with a loan you are clearing that balance down over a period of time at a set amount.
Thanks for your help nonetheless.
Sara (Debt Camel) says
Debt advisers see far too many people who make a big mistake in consolidating debt at high interest. 49% is an insane rate. If you struggle, the credit cards will get used again and soon you will be back with high card balances and the large loan.
If you think you can get by without, then I suggest you do not consolidate. Look again for a loan in 6 months or a year if your credit scores are better then.
If you think you can’t manage without this loan, then do yourself a big favour and take debt advice.
You don’t have to go for insolvency. With credit cards and overdrafts a debt management plan can work well is you calose to be able to manage. The interest is frozen and the debts really start to drop.
Sara (Debt Camel) says
I agree with Weatherman – talk to a debt adviser about your options.
It is frequently a VERY bad idea to consolidate debt at astronomic rates of interest.
Taking this loan over a longer period dramatically increases the interest you will pay.
Planning on getting this loan and then refinancing it will often prove much more expensive than you think because in the first part of a high interest loan you pay almost all interest and very little off the amount borrowed. Then when you want an early settlement they charge you for an extra months or two’s interest.
Liam Attrill says
Ok, i do appreciate the advice and I will talk to a debt adviser. I just feel it will undo all the hard work we’ve done and don’t want to start again for another 6 years when we are 3 years in to having progressed so far. From defaults and missed payments to 2 defaults paid off and not a missed payment in 3 years.
From the kind of interest we were paying to what we have now is a drop in the ocean albeit, still high for someone with a great credit score. Compared to paying out £277 on loan repayments we now only have to pay £184. Ok, the loan term has extended by a year but makes it more beneficial should something go wrong but also, reducing the credit card debt frees up more money.
I think in this instance I will just stick to the £3.5k loan over 3 years until a better option comes up with lower APR to reduce the term further. And then just keep chipping away at my wife’s Marbles Credit Card as and when we can.
Thank you though and I will speak to a debt adviser to understand if there’s something that might be more beneficial though.
Karen martin says
Has anyone got a mbna credit card and will the company set up a payment plan if you are struggling with the minimum payment many thanks
Sara (Debt Camel) says
All credit cards have to offer you help – sometimes called “forbearance” – if you can’t afford the minimum payments eg if you would have to borrowing elsewhere or getting behind with bills. The usual way to do this is by freezing interest and charges and letting you make a lower payment. The lower payment can be a token £1 a month or even zero if necessary.
See https://debtcamel.co.uk/arrangement-to-pay/ which looks at this in detail.
Karen martin says
Are mbna credit card company any good to do a payment plan for say 6 months many thanks
Sara (Debt Camel) says
Same answer as for Barclays! Get yourself a budget sheet that shows what you can offer to each of them And tell each lender you are also asking the other lender for a payments arrangement.