Prepare before you borrow

The financial crisis has made many of us think twice about opening a savings account, let alone taking on any new credit deals. But if you are one of the millions of people who need to borrow in the next few months – perhaps because your current mortgage deal is coming to an end or you have to make a major purchase – it’ll pay you to get your finances in shape now.

There’s no doubt that, when it comes to credit, finding a good deal is nowhere near as easy as it used to be.
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Five ways to cut your credit card bill

Depending on how you use your credit card, it can be your ‘flexible friend’ or your worst enemy. For example, if you spend sensibly and always repay your monthly bill in full, then you can enjoy up to 59 days of interest-free credit, plus a yearly cashback rebate, too.

Sadly, spending on credit cards is so convenient that millions of us get carried away, building up debts that could take years (or even decades) to repay. Indeed, Bank of England figures show that total credit-card debt now stands at over £53 billion. With 30.8 million credit-card users in the UK, this averages out at roughly £1,720 per cardholder.

As I often remark, ‘averages invite comparisons’ — and not one of us is precisely ‘average’. In fact, some have plastic debts running into tens of thousands of pounds. The big problem for these borrowers is that the entire banking system is geared towards charging them as much as possible. Thus, thanks to interest and other charges, a large balance can take a lifetime to repay.

However, there are steps you can take to end the vicious circle of debt breeding yet more debt. Here are five ways to dynamite your plastict:

1. Keep to the rules of the game

If you exceed your credit limit, miss a repayment, or fail to pay on time, then you have breached your card’s terms of use. To punish you, your card issuer will charge you a fine, typically £12 for each and every offence. Therefore, it’s vital to ensure that your monthly repayments arrive promptly.

The best way to do this is to set up a monthly standing order or direct debit for at least your minimum monthly repayment. If you have any spare cash left over at the end of the month, then by all means make extra repayments as and when your budget permits.

2. Scrap your payment protection insurance

Payment protection insurance (PPI) is perhaps the biggest financial rip-off ever invented. Credit card PPI (known as credit card repayment protection, or CCRP) is incredibly expensive. In fact, as an ex-industry insider, I know that profit margins on CCRP can exceed 80% or even 90%!

So, check your latest card statement to see if you’re paying monthly premiums for CCRP. Typically, CCRP premiums will cost between 0.8% and 1% of your balance a month. Frankly, this is far too much to pay for this life, accident, sickness and unemployment cover. So, unless you’re claiming on a CCRP policy, or expect to lose your job any day now, then cancel your cover and put the saving towards lowering your debt.

3. Try a 0% balance transfer

A typical credit card charges interest of around 17% a year on purchases, plus around 25% a year for cash withdrawals. Given that the Bank of England’s base rate is now a mere 0.5%, these are rates to make any money-lender blush.

One way to avoid high interest rates is to make use of a 0% balance transfer. By shifting your debt to a 0% credit card, you can dodge interest for up to 16 months. Then again, there is a price to pay for stopping the clock on your interest bill: these deals come with a transfer fee, typically 3% of the debt transferred. My favourite 0% transfer card is the Virgin Credit Card, which has topped the best buy tables for months. As salesmen often remark, I have one of these myself!

4. Cancel your card protection plan

The major providers of card protection plans are CPP and Sentinel. These companies offer protection against losses due to fraud, theft and card loss in return for a fee of £15 to £30 a year. Based on my industry experience, I suspect the true cost of this cover is under £5 a year. Hence, this is yet another expensive add-on which you can well do without. Furthermore, the Consumer Credit Act limits your fraud liability to just £50, which many card issuers will waive.

5. Avoid minimum monthly repayments

A credit card debt of £2,000 can take over three decades to repay. This is because the minimum monthly repayment (MMR) demanded by most credit cards is ultra-low at say, 2.5% of the monthly balance. What’s more, as your balance reduces each month, so too does your MMR, as it is a fixed percentage of a falling amount.

The simple way to avoid MMRs is to set up a monthly standing order or direct debit for a fixed, rather than a falling, amount. For example, if you owe £2,000, then a flat £50 a month will repay 2.5% of your original debt, rather than 2.5% of what’s owed. Over time, this one simple change will kill off your debt much faster, save you thousands of pounds, and bring forward your debt-free day by decades.

Finally, always remember that you have a credit limit , not a target . Thus, if you’re serious about ending your dependence on debt, then it makes sense to lower your limit as your balance reduces. This prevents you from re-borrowing and undoing your good work!

By Cliff D’Arcy

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