Paying off debt as fast as you can often makes a lot of sense. The quicker you do it, the less interest you’ll pay meaning the less you’ll pay back overall. In this article we look at ways you can do this.
What to think about first
Before deciding to pay off a credit card or personal loan, it’s important to review your overall situation.
Firstly, make sure you’ve got your priority bills covered such as your rent or mortgage, council tax and utility bills as there can be serious consequences for falling behind on these.
Next, make sure you’re able to pay the minimum payments or fixed instalments on any other debts you have.
You may also want to make sure you’ve got some spare money set aside for emergencies.
Once you’ve done this, you can look to use any leftover money to pay off your debts. Pay off your most expensive ones first (these are the ones charging the most interest). This is often credit card or store card debt.
Ways to pay off your credit card faster
Check if you can get a better dealIf you’ve got a good credit rating, you may be able to move your credit card debt to a 0% balance transfer card. For a period (usually 18 to 29 months, depending on the card) you won’t be charged any interest on the balance you transferred. Instead you could use the money you’ve saved on interest to pay off your debt more quickly.
It’s important to pay off the debt within the interest-free period as the interest rate will jump back up at the end of it. Also, you may be charged interest on new purchases and you’ll usually have to pay a transfer fee (typically 1-3% of the balance you transfer). So, if you transfer £500 to a new card and the transfer fee is 3%, this will cost you £15.
Even if you don’t qualify for one of these cards, you may still be able to switch to a card with a lower interest rate. You can search for the latest credit card deals on price comparison websites. The Money Advice Service has a useful guide on using price comparison websites to help you find the right credit card.
Pay off as much as you can afford each monthYou only have to pay the minimum amount as set by your lender each month. But choosing this option means your credit card balance will reduce very slowly, and it can take years to clear the debt. If you can, it’s much better to pay even just a little more.
For example, if you have £2,000 on a card charging the average annual interest rate (25%) and you pay the minimum amount each month, it can take 25 years to clear the debt and cost over £3,500 in interest. Your minimum payment starts at £57 but reduces each month as your balance falls, which explains why it takes so long to pay off the debt.
If you choose to pay a fixed amount of £60 a month instead, you can cut the amount of interest by £2,367 and be debt-free nearly 21 years earlier. That’s over 20 years of no credit card debt!
Try a credit card repayment calculator to see how much you could save.
How to pay off a personal loan faster
- Increase your monthly repayments
Personal loans are designed to be paid off over a fixed period and your monthly repayments are set at the start to ensure this happens. But did you know that you can overpay so that you pay less interest overall and pay off your loan faster? If you took out your loan after 1 February 2011, in most cases your lender can’t charge you for doing this providing you don’t overpay by more than £8,000 in a year. If you want to overpay, you must notify your lender before doing so.
- Check what interest rate you’re paying
It’s worth checking if you can switch to a cheaper loan and use this to pay off your more expensive loan in full. If you do this but stick to the same repayments you were making, you’ll pay off your loan faster and pay less interest overall.
Check with your lender first to see if there will be any penalties for paying off your current loan early – again, there shouldn’t be if you took the loan out after 1 February 2011 and you are paying back less than £8,000 in a year.
You can search for personal loan deals on price comparison websites. To find out more about how to get the most out of price comparison websites, see this article from the Money Advice Service.
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