We are, says The Times, reaching “unknown levels of indebtedness”. Individual voluntary arrangements (IVAs), also known as ‘bankruptcy-lite’, exceeded 50,000 last year, up from around 20,000 in 2005. Including bankruptcies, more than 100,000 people were declared insolvent last year and analysts expect that total to breach 150,000 in 2007. But even if you’re not on the verge of picking up the phone to your nearest IVA provider, you may well have no cause to feel smug. Many of us are much closer to having debt problems than we like to think. With that in mind, it is well worth doing an audit of your debt to make sure that you are managing it (and cutting it down) as well as you can.
Debt help: Shift credit card
The first thing to do is to look at your credit-card debt. With most firms charging interest on this at a good 16%, you should pay off whatever you can: there is no point in having savings in the bank earning 5% when you are losing three times that on debt. Next, you need to switch anything you can’t pay off on to the lowest possible interest rate you can. Most cards still offer 0% rates on balance transfers, some for up to a year. But if you do this, you then need to be ruthlessly disciplined in paying the debt down: when the introductory period ends you’ll be back to paying 16% again.
You must also make no new purchases, as these will usually attract interest at the usual rate and any payments you make to the card will be used to pay off your cheap debt first. The result? Any new debt sits there, trapped on a high rate and accruing interest (on which you pay more interest) fast. This is a great trick and one that all providers use. Don’t fall for it. Also note that you will be charged a ‘transfer fee’ when you move a balance – often 3%.
Debt help: Switch personal loan
Next, check your personal loans. You should be able to get a pretty good rate on these. If you aren’t and there are no early payment charges to dissuade you from changing to a different lender,
do so immediately. Fool.co.uk lists the best deals on the market. Currently, Moneyback Bank and Alliance & Leicester are both offering a rate of 5.9% on a typical loan of £8,000 to be paid back over 36 months. If you have a student loan, stick with it: at 3.9%, the rate on these is below inflation (as measured by RPI). That’s a great deal.
Debt help: change bank
Having an overdraft is not a very bright way to borrow money, except for in the short term, but if you often use your facility you might want to double check the rate you pay. Alliance and Leicester offers new customers 0% overdrafts for the first year with its online direct account (and pays 6.1% if you’re in credit). And even after that, it charges only 5.9%.