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:
- 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!
- you want to cut your monthly repayments so life is a bit easier. That’s OK, but can you stop spending on the cards? If you can’t then your debt is going to continue to grow – it’s better to get debt advice now.
- you can’t afford the monthly repayments. 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 loan you could get would probably be expensive. Read What to do if you can’t pay a debt this month which looks at your choices.
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.
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 in 2018 they became less good and harder to get in late 2018 – but 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 as that 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.
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
88 money saving ideas – some will work for you!
How far can you cut back? Be sensible!
Ian says
Why have the fob put on hold wonga complaints until they hear whats going to happen why cant they carry on and then the claims will be ready to go instead of waiting 3 or 4 month when they could be sorting the claims out dont get it.
Sara (Debt Camel) says
FOS has now returned all Wonga complaints to the administrators, see https://debtcamel.co.uk/wonga-administrator-proposals/ and https://debtcamel.co.uk/wonga-has-stopped-issuing-loans/. That latter link is kept updated.
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