With Christmas and new year over for another 12 months, many of us will now be trying to repay the debts we've run up. Which? Money experts round up 10 ways to cut the cost of borrowing in 2012.
1. Switch to a 0% balance transfer credit card
While the Bank of England base rate has stayed at 0.5% throughout 2011, average credit card rates have stayed sky-high at over 17%. If you're paying interest on your credit card, think about switching your balance to a Best Rate 0% balance transfer deal - the best deals currently offer up to 22 months interest-free.
2. Reject increases in your credit card APR
If you owe money on your credit card and your card company says it's going to jack up your interest rate, you have 60 days to contact the company and reject the increase. You won't be able to use the card for further spending, but you will be able to repay anything you already owe at your old, lower rate. Use our credit card template letters to reject APR increases.
3. Join a credit union or CDFI
Credit unions are non-profit organisations, owned and controlled by their members, that offer loans. Loans from credit unions are generally cheaper than loans from most other providers for smaller amounts and do not incur set-up fees, administration costs or early redemption fees.
Many credit union loans, for example, cost 1% a month on the reducing balance of a loan (an APR of 12.7%). By law, the amount of interest charged by a credit union can be no more than 2% a month (an APR of 26.8%), making them much better value than payday loans and doorstep lenders.
Community development finance institutions (CDFIs) are similar to credit unions: they are not-for-private-profit social enterprises providing affordable finance to those often unable to access mainstream financial services. As well as offering loans many also offer debt advice and access to savings accounts.
4. Avoid high cost credit such as payday loans
Not only are payday loans incredibly expensive, with APRs of over 4,000% in some cases, a recent Which? Money investigation into payday loans found widespread poor practice. Payday loans should only ever be used as a short-term last resort and even then are rarely a suitable option.
5. Improve your credit score
Before you apply for credit, check your £2 credit file with Experian, Equifax and Callcredit. If there are mistakes on your file, or if you have a poor credit history, this will affect your chances of acceptance when you apply for a loan, as well as the interest rate you'll be offered if your application is successful.
If you already owe money on your credit card, it's worth checking your credit file once a year as your card provider may hike up your interest rate if it thinks you've become a riskier bet.
6. Pay more than the minimum on your credit card
If you only pay the minimum payment on your credit card, not only could it take you years to repay the full balance, you may also be damaging your credit score. Your credit report records whether you are making the minimum payment or a bigger amount - if you're not on a 0% deal, only paying the minimum on existing debt may suggest to potential lenders that you're struggling to balance your finances, making it less likely that they'll lend to you at a competitive rate, if they'll lend at all.
Use our credit card repayment calculator to work out how much quicker you could pay off your bill and how much you could save.
7. Consolidate your debts with a personal loan
If you owe money on a credit card or overdraft with a high interest rate, it's worth considering a Best Rate personal loan. These often charge a lower APR and give you certainty over the monthly repayment and the period over which you'll clear the debt.
If you're tempted by adverts on television offering consolidation loans, watch out - they're usually best avoided. Most either charge a high interest rate, spread your repayments over an inappropriately long period or secure the loan against your home. Consolidation loans are only worth considering if they cost you less than your current borrowing arrangements.
8. Get independent, free debt advice
If you can't afford the repayments on existing debt, it's better to get free, independent advice rather than getting further into financial trouble. Our free guide How to deal with debt includes contact details for the major debt advice charities and explains why you should never use a fee-charging debt management company (DMC).
9. Get an authorised overdraft
If you think you're likely to go into overdraft, or to exceed your existing overdraft limit, speak to your bank as soon as possible as it may be willing to increase your authorised overdraft. Going into unauthorised overdraft will trigger a whole host of extra charges and this method of borrowing can be even more expensive than payday loans.
10. Pay off debt before saving
While it's good to have a financial savings cushion for use in emergencies, there's little logic in having savings if you also owe money on a credit card or overdraft. While the best instant-access savings accounts pay around 3% AER, the average interest rate on a credit card is over 17%.
Using your savings to pay off your borrowing could save you hundreds of pounds a year in interest charges.
Read more: http://www.which.co.uk/money/credit-cards-and-loans/guides/10-ways-to-pay-off-your-debts-in-2012/#ixzz1kwtKJx9L Consumer Champions Which? Under Creative Commons License: Attribution Non-Commercial