Start Your New Year Debt Detox!
Which financial product offers you the best chance of beating down your debts in 2009?
Christmas is complete, and the festive season is finished. But now the party’s over, many of us are left worrying about the weight we’ve put on, the stress of going back to work – and, perhaps more importantly, the toll that seasonal spending will have taken on our wallets…
Debt detox
If your list of New Year’s resolutions included the decision to detox yourself of debt in 2009, well done.
While 2008 was a difficult year for many Brits, this year things could get even tougher – and reducing the amount you owe is a key way to prepare for the coming financial storm.
When it comes to dealing with your debts, there are several approaches you could take. The best involve shifting existing borrowing to a new, cheaper financial product – reducing your interest payments and making your debts cheaper and easier to tackle.
Bash your borrowing with credit cards
Opting for a credit card that comes with a 0% deal on balance transfers could see you save thousands of pounds in interest, depending on how long it takes you to repay what you owe. At the moment, the market leading 0% offer comes from Virgin, whose Credit Card offers an amazing 16 month break from interest payments.
Likewise, choosing a credit card with a long-term low rate of interest for balance transfers could seriously cut the cost of paying back your debts.
Nevertheless, balance transfers deals don’t provide the perfect solution for everyone. If you’re unlikely to clear your debts within the promotional period on offer, you’ll need to remember to apply for another balance transfer credit card when your current deal ends.
Moreover, the flexible nature of credit card borrowing means you must discipline yourself to pay off a fixed sum every month if you’re to clear your balance quickly.
What’s more, you must completely avoid new spending on a balance transfer credit card. If you use a balance transfer card for purchases, your lender will charge you interest on them – which will continue growing until you’ve paid off your entire balance transfer.
It’s also worth remembering that your credit history will affect your ability to obtain a balance transfer credit card – particularly a 0% deal. It’s worth checking your rating with an agency such as Credit Expert before applying for a top product, as being rejected for credit will add a blemish to your file.
What about personal loans?
When the credit crunch first began to bite, personal (unsecured) loans were among the worst-hit financial products. Even now, there are few personal loans whose rates can compete with the special deals available from some credit card providers.
Nevertheless, the cheapest personal loans on the market compare favourably with the standard rates charged by most credit cards. Nationwide and the AA, for instance, both offer loans at 7.9% APR – while many credit cards charge a whopping 16.5% on balances.
Therefore, shifting debts from expensive credit cards to a top personal loan could save you some serious money.
Personal loans also come with perks that many credit cards can’t claim. Firstly, once you’ve arranged your loan, you’ll be able to pay back what you owe at a fixed rate of interest – without having to apply for any more credit during the time it takes to clear your debt.
Secondly, signing up for a personal loan will mean agreeing to a strict system for paying it back. For anyone who fears they may not be disciplined enough to repay a credit card debt so rigidly, this is a definite advantage.
Which loan is right for you?
Right now, it’s crucial to check your credit history before applying for a personal loan.
Market leading loan rates are generally available only to those with excellent credit scores. This means those with blemished credit histories could find themselves landed with a worse loan than they expected from a potential lender – or worse, no loan at all.
If you feel confident applying for a best buy loan, Nationwide and the AA’s offerings are worth considering.
Alternatively, those with weaker credit scores should consider borrowing at a higher rate of interest. A rate of 8-10% APR might be more achievable – so a loan from Alliance & Leicester (at 8.7%) or Barclays (at 9.9%) could be a better bet.
It’s also worth remembering that personal loans become cheaper the more you borrow. You’re likely to get a lower rate for a loan of £10,000 than for a loan of £5,000 – in fact, all the loan rates listed above are for borrowing sums of at least £7,000.
However, you should never borrow more than you need to using any form of credit. If you do, your dreams of debt detox will be over before they start!
While you can probably afford to let weight loss worries fall by the wayside, beating down your debts is one resolution worth keeping in 2009.
Good luck, whichever method you choose!
Compare a wide variety of loans at BeatThatQuote.com.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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