Pay less interest: 0% cards, debt consolidation, remortgage

Paying high interest on credit cards and overdrafts makes them much harder to pay off. Most of your monthly payment is just interest and the balance goes down so slowly. So if you can cut the interest you are paying, then the debts will be cleared much faster.

There are three main options here

1. get a 0% balance transfer card;
2. get a cheap loan, consolidating some or all of your expensive interest debt;
3. remortgage.

This page is aimed at people who are making at least the minimum payments on their debts and want to clear them faster. Reducing your interest rates is a key part of the “Snowballing” approach to paying off your debts fast.

If you can’t afford the minimum payments each month, none of these options is likely to work for you and instead you should talk to a debt adviser.

How good is your credit rating?

There is a popular saying that your bank will only lend you money if you don’t need it.

It’s true! The people who will be able to reduce the interest on their debts most easily are people with a good credit record, and even they may have difficulty if they have already got a lot of debts.

The first step is to check your credit record. If it’s not good, then you can try to improve it, but until then your options are very limited. If you get a letter saying the interest rate is being increased on your credit card, you can normally opt to stay on the current rate if you stop using the card.

Time is a great healer of credit records. The longer you make the minimum payments to your debts, the older your previous problems are. After six years even defaults and CCJs disappear.

If your credit record is looking good or very good, go for one of these three interest reduction options:

1) get a 0% balance transfer card

These cards let you transfer a balance from your current card to a new one, charging a fee which is added to your debt at the start.

There are some good 0% offers around in 2020 if you have a very good credit record, but they are harder to get and the limit – the amount you can transfer – may be smaller than you want.

The 0% only lasts for a set time –  after that interest is charged. So when you are trying to decide between Balance Transfer offers, if you can clear the debt in the offer time, then go for the lowest fee. If you can’t, think about choosing the offer with the lowest follow-on rate.

Other important points about 0% Balance Transfer offers:

• you normally can’t transfer from one credit card with the same bank to another one – phone the Balance Transfer offer bank to check your transfer from XYZ card will be possible
• you must make the minimum payment each month, if you miss one the 0% offer will probably be withdrawn
• don’t use these cards for spending – new spending won’t be at 0%
• if you are rejected, then leave it a while before reapplying as too many applications will harm your credit record.

Before you decide that 0% deals are the best thing ever and jump right in, be careful you don’t slip into more debt with them. A survey by the Fair Banking Foundation found that:

• 41% of people who have taken out a 0% per cent credit card for spending failed to clear the debt at the end of the period
• 45% who took out cards to transfer balances failed to clear the debts by the end
• 29% of people who took out best buy credit cards for spending or balance transfer ended up with more debt at the end than they had at the beginning.

Many of these people will have gone for the 0% deals in order to reduce their debt. But they found that the long period of not having to pay any interest meant they stopped thinking it was important to pay off this “free” debt. This is a big mistake!

There is no guarantee that you will be able to get another 0% deal at the end of the current one. The peak of balance transfers was in 2017. Since then every year they have got shorter and with higher fees. And in 2020 with Cornavirus a lot of the deals are being pulled completely.

And if you want to get a mortgage, or re-mortgage, then lenders are increasingly concerned about the amount of debt people have, even if it is at low or zero interest rates. You may think a large balance at 0% is unimportant but the mortgage lender will see it is a real debt. See Can I get a mortgage with debts? for more details.

2) Debt consolidation

If you have credit cards charging loads of interest, the idea of debt consolidation sounds so inviting. Just one cheap loan would be so much easier to manage! This could be a good move for you if you are disciplined. But this can be the first step that turns a manageable but not great debt situation into a disaster.

Don’t be like the man who had 14k of debt on his credit cards, then he borrowed 10k from his bank, and used it to cleared the most expensive of his credit cards. That was a good start, but he didn’t change his spending and started using his cards again. Three years later he has again maxed out his credit cards and also has most of the loan remaining, so he is in a much worse position and can’t get any cheap loans now as he is overextended.

Mistakes people make with debt consolidation include:

• not closing down a credit card you have cleared. Keep one perhaps, but reduce its credit limit to something very small and pay it off in full every month.
• ignoring the root cause of their debt. If you are simply spending too much for your income, lowering the interest on your current debt isn’t enough, you need to tackle your overspending.
• borrowing more than you need or for a longer period than is necessary. Cheap debt is better than expensive debt – but it still postpones the day that you will get debt free!

It can be hard to get a large unsecured consolidation loan even with good credit and it’s usually impossible if you have bad credit.

But going for a secured loan – sometimes called a second mortgage – is much more dangerous as you are putting your house at risk if things go wrong. The huge problems with secured loans include:

• If you get sick, or your income reduces at some point the Benefits system will help you with your mortgage payments. But it won’t help you with the cost of a secured loan or second mortgage that you have taken out on top.
• If you still had those ‘expensive’ credit card debts, then you could just make a token payment DMP until you got back on your feet again. But after refinancing the debts from unsecured to secured, they can no longer be included in a DMP and token payments are not possible.
• Most secured loans are variable rate. If you are borrowing from a “sub-prime lender” (basically anyone that isn’t a high street bank or building society) then you may find that the lender puts your rate up even when other interest rates aren’t changing!

If you are aware of this but still feel that this is a good option for you, then you MUST:

• ONLY borrow the minimum you have to, for the shortest possible period
• be VERY SURE you can clear the secured loan AND your mortgage before you retire.

3) Getting a cheaper mortgage

Here I am not talking about increasing your mortgage to consolidate debts, but to cut what you are paying on your current mortgage.

In summer 2019, the average mortgage rate for 2,3 and 5 year fixes was under 2%. But many people are paying their lender’s Standard Variable Rate (SVR) when a fix has ended. And that can be 4% or more.

On large mortgages this adds up to a lot of money each month.

If you are paying more and you have a good credit record and a good amount of equity, you may be able to save a lot of money by remortgaging with a different lender. With a poor credit record, you may still be able to remortgage with your current lender and save a lot – it’s worth asking!.

Take a £200,000 25 year mortgage. At 2.99% the monthly payment would be £956. At 4.81% it would be more than £200 a month more. So even if your mortgage doesn’t feel like a problem, if you can remortgage it could free up a lot of extra money to pay off your other debts.

Of course you have to look at arrangement fees and decide how long to fix for. The MoneySavingExpert best buy mortgage page makes this a bit easier.  A few hours of work could make a big difference to your finances.