Millions of households are nursing debt hangovers from Christmas spending – often on top of more long-standing balances they are struggling to shift.
It’s no wonder – debt is often so easy to access, whether in the form of credit cards, overdrafts or personal loans. But it’s much harder to pay back when budgets are already under pressure.
One in three people rang in the New Year with credit card debt against their name, according to a survey by Tesco Bank. Of those in debt, the average balance is a hefty £5,600, the bank said.
Almost everyone is in one form of debt or another, either as a short-term loan, credit card debt, a mortgage or student loans.
Here Money Mail reveals what you need to do to get out of credit card debt fast this January, which debts you don’t need to worry about and if it’s ever worth overpaying on your mortgage. Follow these simple steps.
Get your priorities in order
It’s important to remember that not all debt is the same – some forms of debt are far more serious than others.
First, make a list of everyone you owe money to and exactly how much, ranking the debts from most to least owed.
The next step is to get your priorities in order and figure out what you will need to pay off first.
As the average credit card APR reaches a record high, it is vital to tackle any long-standing debt this January
Court fines, mortgage or rental arrears, council tax bills, the TV licence and energy bills should always take precedence.
Once that’s all paid, you can turn to any credit card debt or outstanding loans you may have. The golden rule with these is to clear the most expensive debt first.
High-interest credit card debt is up there, ranking as one of the most expensive forms of borrowing.
The average credit card APR is at a record high of 35.8pc. So if you have not managed to pay off any of your credit cards this January, it’s crucial that you figure out how to minimise the cost.
After you’ve cleared any short-term loans and credit cards, you can then turn to student loans or any plans you may have to clear your mortgage early.
Buy yourself time with a balance transfer card
One of the cheapest ways to attack your credit card debt is to use 0pc balance transfer cards.
These allow a borrower to move their existing credit balance to a new card and pay off their debt quicker without accumulating interest – as providers typically have an initial interest-free period for a number of months.
Balance transfer cards can be a crucial tool to buy you more time, but it’s vital that you are disciplined and pay off as much as you can afford each month without being tempted to spend more on the card.
The longest 0pc deals are currently 35 months. You should aim to pay off your balance before the 0pc promotional window ends to get the full advantage of a balance transfer card.
Providers tend to charge a fee to switch cards and customers are rolled on to a high APR after the interest-free period.
Depending on how much credit card debt you have, you might need to use multiple 0pc balance cards.
For example, if you had £20,000 worth of credit card debt you probably won’t be able to switch the full amount to 0pc borrowing, certainly not on a single card.
You should shift as much as you can to one or two of these deals, prioritising those with the highest interest rates.
Providers offer zero per cent balance transfer cards with interest-free credit repayment for a limited time, which can help you clear debt fast
Andrew Hagger, founder of the MoneyComms website, advises that paying a one-off fee can be worth it to clear debt using a 0pc balance transfer card
Andrew Hagger, founder of independent information website MoneyComms, says: ‘If the new zero per cent deal clears one of your existing card balances in full, be sure to close that card account down so it takes away any temptation to spend on it again.
‘You’ll need to pay a one-off balance transfer fee, but this only equates to approximately one and a half months’ interest, so in the scheme of things it’s a small price to pay.’
Mr Hagger points to HSBC’s Balance Transfer Credit Card which offers 35 months of 0pc interest and comes with a 3.19pc one-off fee, Barclaycard Platinum’s card with 24 months at 0pc and a 3.45pc fee as well as TSB’s card with 38 months at 0pc and a 3.49pc fee.
If used correctly, you can make substantial savings with these cards and turbocharge your plan to pay off debt.
For example, if you are £3,000 in debt on a card charging the standard 24.9pc APR, you would be incurring £62.25 in interest each month.
If you moved this £3,000 debt to HSBC’s Balance Transfer Card, the one-off transfer fee would cost you £95.70 (3.19pc), leaving you with a total of £3,095.70 to pay off over 35 months – that’s £88.45 per month.
The good news is that you no longer have that £62.25 in added interest to pay on top of the initial debt each month.
If you think you can pay it off quicker than this, there are shorter 0pc balance transfer terms available with no transfer fee.
For example, Barclaycard offers 14 months at 0pc and no fee – to clear a £3,000 balance over this period you would need to pay £214.28 a month.
Overpay your loan by as little as £30 a month
If you’re struggling to get on top of your debts, it might be because you have been ushered into making the minimum repayment each month when you could afford to pay more.
Paying the very minimum can mean that your debts will hang over you for a lot longer than they need to.
To avoid this, get your budget in order and work out exactly how much you can afford to set aside each month.
You can clear your debts faster and slash your interest by finding as little as £30 a month extra.
For example, if you had £300 in debt on a credit card with a 35.7pc APR – the average rate according to scrutineers Moneyfacts Compare – it would take a year and eight months to clear on a fixed repayment of £20, plus it would cost £84 in interest.
Increasing this payment to £50 a month would clear the debt in just seven months, cutting the interest on it to just £30.
Cut your mortgage term by 13 years with this trick
The mortgage for the home you live in is the biggest debt most people will take on in their lives.
While you will have agreed a term with the bank or building society, there is a way of paying off your home loan sooner. Not everyone is aware you can typically overpay your mortgage by 10pc each year without penalty.
Making overpayments on your mortgage is a way to get debt free and pay less interest on your principal.
Your lender will allow you to overpay a certain percentage of your mortgage each month. If you go over this allowance, you may have to pay an Early Repayment Charge (ERC). This is typically between 1 and 5pc of what you still owe on your mortgage agreement.
If you pay your mortgage each month by direct debit, you can request that the lender increase this by a call or online request depending on your lender.
If you pay by standing order, you can increase the standing order amount yourself.
In the long run, this can make huge savings. For example, if you had 40 years left on a £250,000 mortgage at a rate of 2pc, you would end up paying back £363,390, including interest, according to This is Money’s mortgage calculator.
If you had locked in at a higher rate of 4pc, you would pay back £578,635 – a huge £328,635 on top of your original loan.
Typical mortgage agreements allow people to overpay the loan by 10pc each year without any penalty, which can reduce the interest you have to pay on the debt (Posed by model)
By paying off more of the debt in the earlier years, you reduce the size of the loan on which interest is charged.
If borrowers with a 40-year term can afford to overpay by £200 a month, it could shave almost 13 years off the mortgage term, saving them around £122,000, based on a rate of 5pc. If the overpayment is £300 per month, then it reduces the term by 16 years and four months and saves around £152,000.
Rachel Springall, finance expert at Moneyfacts Compare, says: ‘Making overpayments to reduce the term and interest incurred is wise.’
However, as a rule of thumb, you should only overpay your mortgage if the rate is around the same or higher than the rate you can get on the money in a cash savings account elsewhere.
If you can get a higher savings rate, you would usually be better off building up a nest egg instead.
You can use this sum to overpay your mortgage at the point at which the balance tips and your mortgage rate exceeds your savings rate.
If you are struggling to keep up with your mortgage payments because your earnings have been reduced, you may have started to build up a debt. This is called being in mortgage arrears.
Simon Trevethick, from debt charity StepChange, says: ‘If you are in arrears with your mortgage, the first thing to do is to speak to your lender who may be able to help.’
Is it ever worth paying off your student loan?
It is important to remember that a student loan is not like other types of debt. You only start repaying it when you are earning over a certain threshold. This ranges from £21,000 a year for a postgraduate loan to £32,745 a year for a plan four loan.
If you do not earn over the threshold for your loan, you do not pay it back.
Student loans are so common that they also rarely affect credit scores or mortgage assessments, meaning even a large debt is not necessarily a disadvantage.
The debt will be written off after between 25 and 40 years depending on when you attended university. More than 150,000 people in the UK have student loan debts of more than £100,000, according to official data, and are therefore unlikely to ever pay it off in full.
This means most young people choose not to overpay on their student loan because they risk paying more than they might have needed to.
Higher earners who are likely to pay off the debt before it is wiped could consider making early repayments to cut down the amount of interest they will incur.
However, you may still be better off putting your money to use elsewhere. For example, you could unlock higher savings rates or use the money to increase the deposit you put on your first home, allowing you to access lower mortgage rates.