It is currently estimated that the average UK household is wrestling with around £2,000 of credit card debt. A figure that does not take into account additional debts like overdrafts, personal loans, hire purchases, and so on.
But according to Martin Lewis, the renowned money-saving expert, there is a quick and surprisingly simple hack that could save the average household a small fortune.
Strategic Switching
Speaking on Thursday’s ITV Money Show, Mr. Lewis said that by strategically switching facilities, millions of people could reduce the interest they are currently paying on a broad range of debts to 0%.
In short, he said that the first thing to do is contact creditors at the earliest possible stage and request a ‘settlement figure’. This is the amount of money that needs to be paid outright to fully repay the debt, along with all associated fees and costs.
Next, you simply take this figure and find the cheapest available borrowing option.
A typical example to illustrate how this hack works:
- An individual has a credit card balance of £2,000 which attaches a standard APR of 15%
- They are also repaying a personal loan of £2,000 over the course of five years at a 5% APR
- The borrower contacts the credit card issuer and the loan provider to request a settlement figure’ for each
- They are quoted £2,200 to repay the credit card balance and £2,100 to repay the loan outright
- This adds up to a total of £4,300
- They then apply for a credit card with a special introductory offer of 0% interest on balance transfers for the first year (or longer)
- They repay their other debts using this new card, and in doing so reduce the interest they are paying to zero
A similar option can also be explored with low-interest personal loans, which can be exponentially more cost-effective than credit cards. Likewise, bridging finance can be a fantastic choice for short-term debt consolidation, where the full balance of the loan can be repaid within a few months. Bridging finance is typically charged at around 0.5% per month, making it a highly cost-effective option when repaid promptly.
A Warning Against Some Mainstream Products
While sharing his tips and tricks on how to cut interest costs, Mr. Lewis also advised against taking out (and/or using) certain types of mainstream financial products.
For example, he highlighted how many overdraft products from major High Street banks attach an interest rate of up to 40% – more than double the average credit card APR.
In addition, he also warned against using credit cards for balance transfers for any other purchases or cash withdrawals, while taking advantage of the offer. Doing so would lead to interest becoming payable on the resulting balance, as standard purchases and cash withdrawals are rarely (if ever) charged at 0%.
While conventional consolidation loans can be a tempting option, many specialist products for debt relief come with the caveat of a negative entry on the borrower’s credit report. It is therefore important to carefully consider all options, before deciding which facility to use to clear existing debts.
Mr. Lewis advised those struggling with debt to contact organizations like Citizens Advice, StepChange, National Debtline, and Christians Against Poverty for confidential and impartial advice.