The best ways to pay off festive debt

Christmas is over but it’s not until January that the bills come home to roost - and it’s not just last month’s spending setting many of us back.

One in five people are still laden with debt racked-up during Christmas 2011, according to research from uSwitch.com. We take a look at the cheapest and fastest ways to get back into the black.

0% balance transfer credit cards

Credit cards that allow you to transfer debt and not pay interest for a lengthy period are a popular way to pay off spending. However, a fee of up to 3% of the balance moved is charged.

Good because…

More than half of credit card users say they wouldn’t consider transferring spending to a balance transfer card, according to new research from Nationwide. But as balance transfer cards allow you to pay off debt without having to pay interest at the same time, it means that you can save money and clear debt faster.

As long as you maintain minimum repayments, you also have a great deal of flexibility with repayments. If you are able to pay off more money one month than another, for instance, you can do this without being penalised with fees.

Even better - the market is extremely competitive at the moment. Providers are chomping at the bit to offer consumers the best deal. Barclaycard now leads the market by offering two years at 0% interest on balance transfers.

Drawbacks…

It’s important to scrutinise the fees attached to balance transfer cards. For instance, both MBNA and Halifax offer cards with interest-free balance transfer periods of 23 months. However, MBNA charges a fee of 2.85% with its Platinum Credit Card, while Halifax charges 3%. It might only be £3 difference on a £2,000 balance, but why pay more than you need to ever.

Because you aren’t paying interest, the urgency to pay off your debt can sometimes be lost with a balance transfer card. And all too often the interest-free period will expire before the full balance has been repaid, which means you have to pay to move debt again (incurring another fee) or your balance is subjected to the card’s standard charges. 

Therefore, these cards are best for people who will make a repayment schedule and definitely pay off spending during the interest free term.

It’s also worth noting that the best offers are only available to people who have an excellent credit rating, so many could be excluded. Therefore, it’s worth checking your score before applying.

Even if you are accepted, you may not be offered a credit limit that will cover the balance you want to move. Consider your options, but it can still be worth switching as much as you can and then pay as much as you can on the remaining expensive debt.

Alternatively, the Capital One Balance Visa is better suited to those with a less than sparkling credit history. The card won’t charge any interest on balance transfers until July this year, though the credit limite is only up to £1,500 and you’re not likely to be accepted if you’ve had a CCJ or defaulted on payments in the last 12 months.

Loans

If you’ve got debts on a few different credit cards or are tired of moving debt between different cards without ever clearing it, a loan could be your best option.

Good because…

Taking out a loan allows you to consolidate your debts, and gives you a set repayment schedule for repaying money.

At the moment rates on loans between £7,500 and £15,000 are now at the lowest level in a decade, after Clydesdale and Yorkshire Bank recently dropped their rates at this level of borrowing to just 5.1% APR.

Once you use the money to pay off credit cards, it’s best to take your cards out of your wallet – or even cancel them – so you’re not tempted to start racking up money on your card again.

Drawbacks…

Most loan providers charge a penalty fee if you unexpectedly have cash and want to use it to repay your loan early.

The best loan rates from the high street providers are for people who want to take borrow at least £7,500. If you want a much smaller amount than this, you’ll be charged considerably more interest by high street providers.

In some instances, it’s worth borrowing more to pay less. For instance, if you initially wanted to borrow £7,000, it’s worth pushing it up by £500 to benefit from lower rates.

Generally, smaller loans tend to be more competitive with peer-to-peer providers, such as Zopa and Ratesetter.

[Related feature: We don't need the banks: Why Zopa, RateSetter and Funding Circle are the future of banking.]


Interest-free overdrafts

Current accounts offered by a few providers, including First Direct and Halifax, offer interest-free overdrafts that can be a useful for paying off expensive debt.

Good because…

Unlike a balance transfer card, you can borrow money without paying interest and without paying a fee.You can move current accounts even if you are already overdrawn and stop paying money on your current overdraft.

Drawbacks…

Each provider offers interest-free overdrafts on different conditions. Halifax is offering it to new customers only and for 12 months only.  First Direct, on the other hand, offers an interest-free overdraft to all customers indefinitely but only up to £250.

However, both providers are also offering £100 to new customers, which can also be put toward to clearing off debt.

The amount of cash available interest-free is relatively small so it may not clear your debts entirely. 

0% money transfer cards


A couple of cards from MBNA allow you to take the credit as an interest-free payment with a percentage fee attached. This can be particularly useful for paying off an overdraft.

Good because…

Most credit cards are only suited to spending or transferring debt from other credit cards. But with charges on overdrafts now at an average 19.65%, according to data from the Bank of England, it has become an increasingly expensive form of debt that many are keen to clear.

A money transfer allows you to use your credit card for cash without paying the expensive charges that you would normally be landed with. The MBNA Platinum credit card, for instance, allows you to transfer cash without paying interest on it for 23 months. After receiving the card, you simply apply to make a cash payment to your current account and then make repayments on your card debt in the usual way.

As with balance transfers, it allows you to a set period of time to pay off debt without interest, which means you should be able to clear it faster.

Drawbacks…

At 4%, the fee attached to a money transfer is higher than a standard balance transfer. And the same drawbacks apply: so make sure you pay off the debt during the interest-free period or you will have to pay to move again or be hit with the card’s APR charges.

[Related feature: Clear your overdraft by Christmas]