In Depth

Four ways to clear your debts

Credit cards and loans can be a slippery slope to financial ruin - but there are ways to save yourself, says Ruth Jackson

Stop paying interest

The first step to getting rid of your debts is to stop them growing. Interest charges can rapidly turn manageable borrowing into a monster debt. But, surprisingly, you don’t need to pay for your debt in most instances.

There are loads of credit cards out there that have lengthy interest-free periods. At the moment it is possible to borrow on a credit card and not pay a penny of interest for more than three years.

If you have credit card debts that are accruing interest then apply for a 0 per cent balance transfer credit card and move your existing debts on to it. Then take the amount you owe, divide it by the number of months before interest kicks in on the card and, if you can afford those monthly payments, you’ll be debt-free before you have to pay interest.

If you have a smaller amount of debt that you can pay off more quickly look for a 0 per cent balance transfer with a shorter interest-free period as these tend to have low, or in some cases no, balance transfer fees saving you even more money.

Move overdrafts and loans

If you’ve got personal loans or an overdraft, you can still eliminate the interest with a 0 per cent credit card, you just need a money transfer card. This type allows you to move money from the credit card into your current account so you can pay off the interest-bearing loans or overdraft and effectively move the debt on to the interest-free credit card.

Use your savings

Interest rates are pitiful these days so if you have some debt and some savings you could be better off using the money you’ve saved to clear your debts. Just make sure you leave yourself a big enough savings pot to deal with emergencies so you don’t end up in debt again.

Stop making minimum repayments

If you are making only the minimum repayment on your credit cards you have fallen into a nasty little trap designed by the lenders to keep you in debt. Minimum payments on most credit cards are a percentage of the debt – this means the amount you are repaying shrinks as the debt shrinks so it will take you an age to pay off the debt.

For example, if you owe £3,000 on credit cards and are making minimum repayments that are three per cent of the debt you’ll pay £90 a month off at first, but as the debt shrinks your repayment will shrink too – so it will be just £60 when the debt gets to £2,000.

Set your monthly repayment at a fixed £90 and you’ll clear the debt much quicker.

On a £3,000 debt with a three per cent minimum repayment it would take you 10 years and nine months to pay it off, and that’s without adding interest charges. Make a fixed monthly payment of £90 and you’d clear the debt in just two years and 10 months. That is a whopping eight years sooner.

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