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Debt: how to reduce your interest payments
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Despite the credit crunch, the UK’s level of consumer debt is still so high that it takes us nearly three months of the year just to pay off the interest. Find out what you can do to tackle your debt more quickly and effectively
Professional advice website unbiased.co.uk has calculated that as a nation, we needed to work for 83 days this year just to pay off the interest on our debts. Only after then can we think about paying off the actual debt itself - and that day, 25 March, has been called Debt Freedom Day.
Although credit-card debt fell by £4.9bn in 2008, the level of personal loans in the UK rose by £1.6bn last year to £11.4bn, while mortgage debt from equity release loans increased by £6.5bn.
dealing with debt
Matter of life and debt
Still, it’s not all bad news for debtors. Although the sharp downward trend in interest rates is proving painful for savers, it should help people to service their debts. The average interest rate on a personal loan is currently 3.25% lower than it was last year.
However, reluctant lenders are also tightening up their credit card criteria to offer customers less competitive deals. While some lenders are increasing their interest rates, others are reducing the availability of interest-free periods for new customers.
David Elms, the chief executive of unbiased.co.uk, says that identifying 25 March as Debt Freedom Day will highlight how much we’re paying in interest to service our debts. He also hopes “it will spur people into action to do something about their debts”.
So what can you do to push Debt Freedom Day up the calendar and reduce the amount of “dead money” you spend on interest?
The first way you can put a lid on the amount of interest you pay is by shopping around before you borrow. For example, our comparison tools, powered by moneysupermarket.com, enable you to compare the latest deals from more than 300 credit cards and 550 personal loans.
If you’ve already got a number of debts, make a list of the various interest rates you’re paying and prioritise the highest. For example, you’re likely to pay a higher rate of interest on a large bank overdraft than your credit card, while store cards are likely to be considerably more expensive than your other cards.
by Tom Murphy, 25 March 2009
