Money matters: five ways to pay off household debt faster — from switching current accounts to zero interest credit cards
The latest debt figures for UK households have reached record-levels.
According to the TUC, excluding mortgages, UK households owe an average of £15,385 to credit card firms and other lenders in the form of unsecured debt.
Interest rates on these types of loans are often high. So how can you speed up repayment?
1. Pay zero on transfers
Credit cards are great in an emergency but if you fail to pay the balance off immediately, they quickly become an expensive burden.
If you only make the minimum monthly repayments, you could be stuck with the problem for decades.
Balance transfer credit cards let you shift the debt from your current card to another that charges zero per cent interest until, perhaps, 2021, giving you time to get your finances under more control.
If you can clear your debts in under two years, NatWest’s 23-month zero per cent interest balance transfer card lets you do this free.
It’s for existing customers so if you’re not one, open a cash ISA first with a minimum £1 to qualify.
Need more time? Barclaycard offers up to 28 months at nought per cent interest for a fee of 1.75 per cent of the balance transferred.
2. Make your current account pay
The days of accruing no interest on your current account balance are thankfully numbered.
Nationwide’s FlexDirect account pays five per cent on your first £2,500, fixed for a year. All you need to do is pay in £1,000 a month.
Even better, linked direct debits aren’t required. This means you can have this account in addition to your existing current account.
If you have the luxury of a higher balance, Club Lloyds pays two per cent interest variable on any part of your balance from £4,000 to £5,000 (one per cent on your balance below this).
They will even give you £125 to switch, plus a choice of additional benefits. You will need to pay in £1,500 per month and pay out two different direct debits to qualify.
3. The best savings rates
You’ve seen the adverts, now it’s time to act: remove the temptation to splurge your paycheck — set up a payday standing order to a regular savings account. In return, banks such as M&S will reward your monthly slug of £25-£250 with a five per cent interest rate.
There are catches. You need to hold, or switch to, an M&S current account; have two active direct debits; not miss a month — and the rate drops dramatically after a year.
Still, if you make the maximum deposit each month you could earn more than £80 in interest in one year. First Direct, HSBC, Santander and Lloyds all have similar schemes for their customers, paying at least 2.5 per cent interest.
If you don’t bank with any of the above and don’t fancy switching, consider Virgin Money.
Its account pays three per cent interest on your savings, lets you deposit up to £250 per month (you can miss a month) and make unlimited withdrawals.
However, you have to open the account in branch and there are only six in London.
For armchair savings, Coventry Building Society regular saver operates online, lets you stash away £500 per month and still pays a healthy 2.5 per cent interest.
4. Technology can help
If you are on a low or irregular income like many Londoners, a regular saving product may not work but Chip might help. This free iOS and Android app connects with all high street banks.
Every few days, its intelligent algorithm calculates how much you can afford to save and automatically transfers cash from your current account into your Chip account. But you still have the final say.
You can cancel any transaction before 3pm, manually move money into your Chip account and pause Chip altogether at any time.
However, Chip is not a savings account and doesn’t have Financial Services Compensation Scheme protection. Instead your money is stored as e-money, in a ring-fenced account at Barclays.
To maximise your savings and boost protection, move your money often from your Chip account to a high-interest savings account or regular saver.
5. Lock money away
If you have a debt mountain, make sure you have a savings account. These generally pay more the harder it is to access your cash.
For instant access, Coventry Building Society’s easy access account pays 1.46 per cent variable interest on balances up to £250,000 and allows up to three withdrawals a year.
More time to save? ICICI Bank UK’s one-year fixed-rate saver pays 1.75 per cent on your entire balance and no upper limit.
If you don’t want to lock away money for years, but can cope with some wait, consider a notice account.
Investec currently offers 1.8 per cent interest on balances from £10,000 to £1 million, providing you give 95 days notice to access your cash. If you don’t make a withdrawal, you earn an extra 0.05 per cent.