“What’s the best way to clear credit card debt?”

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 big 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… You need to look at your serious debt problem 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.

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 2020 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: