Three ways to avoid paying interest

Fed up with paying out lots of money in interest? Here's how to avoid paying interest all together...

Most of us know that borrowing can be expensive. But if we needed further proof, according to Moneyfacts, since 2006, credit card interest rates have steadily increased so that they are now at a 13 year high of 18.9%!

To give you an idea of just how high this is, borrowers with a £5,000 debt on their credit card who only pay the minimum monthly repayment* will now repay an additional £2,360 over the life of the debt compared to February 2006.

The table below shows the difference in interest rates over the past 13 years:

Source: Moneyfacts

Up until the start of this year, the majority of credit cards operated a sneaky trick known as negative order of payment, where the least expensive debts were paid off first – leaving your most expensive debts to rack up lots of interest. 

However, from the start of this year, credit card lenders were persuaded to move over to positive payment hierarchy (although some are cunningly trying to get around it, as you can find out in Credit cards that bend the rules).

Although positive payment hierarchy is great for consumers, its introduction is likely to make a dent in lenders’ revenue streams – and as a result, interest rates are likely to continue going up, not down.

So if you’re concerned about rising interest rates, what can you do about it? Well, fortunately, there are still several ways you can avoid paying interest on your debts.

Interest-free balance transfer credit cards

If you have a lot of debt on a credit card that’s racking up stacks in interest, the best thing you can do is to transfer that debt over to a 0% balance transfer credit card – that way, you won’t have to pay any interest on that debt for a set period.

The table below highlights four of the best 0% balance transfer cards on the market right now:

**Limited offer. £20 off your fee when you transfer £3,000 or more by 28 February.

As you can see, the Barclaycard Platinum with 17 Month BT Visa is the most competitive 0% balance transfer credit card, offering an interest-free period on balance transfers for 17 months. So that means you’ll have almost a year and a half to start tackling your debt head-on, without worrying about the interest stacking up. That’s certainly a lot better than paying 18.7%!

After all, if you had a debt of £3,000 on the Barclaycard Platinum with 17 Month BT Visa and you paid off £200 per month, taking the 2.9% transfer fee into account (which would work out to be £87 on the £3,000 debt), it would take you just over 15 months (one year and three months) to completely clear your debt. And during that time, you wouldn’t have paid any interest.

However, if you didn’t transfer your £3,000 debt across to an interest-free card and instead, kept that debt on a card paying 18.7%, it would take you one year and six months to clear the debt and you’d fork out £404 in interest. I know which option I’d rather choose.

As always, if you’re using a 0% balance transfer card, remember to pay off the balance in full before the interest-free period comes to an end to avoid being hit with interest. Find out more in 20 top 0% balance transfer cards.

Interest-free purchases

If you’ve got an important, but expensive, purchase coming up and you’re likely to struggle to pay for it in one go, you might be contemplating using the plastic once again.

So if you are, make sure you’re not going to get charged expensive interest rates. Instead, plump for a 0% on new purchases credit card and enjoy a period of interest-free spending.

For example, the Tesco Clubcard Credit Card MasterCard offers interest-free spending for 13 months. What’s more, you’ll be able to earn Clubcard points as you spend – for every £4 you spend on the card anywhere in the world, you’ll collect one Clubcard point.

Your credit card also doubles as a standard Clubcard so you’ll collect points on your Tesco purchases as well. And if you take out the card before 3 March, you’ll receive an extra 500 Clubcard points.

Alternatively, the Sainsbury’s Finance MasterCard for Nectar Card Holders offers 12 months interest-free spending. But bear in mind you will need a Nectar card to qualify.

With both of these credit cards, make sure you pay off the balance in full before the interest-free period comes to an end.

Find out more in The best credit cards for spending.

Interest-free overdrafts

If your credit card debts are sorted, it might be that you’re struggling with your overdraft instead. Unfortunately, more and more lenders are starting to charge monthly fees for their overdrafts. And as a result, using your overdraft regularly can work out to be very expensive indeed.

However, if you know where to look it is still possible to get your hands on an interest-free overdraft.

We’ve long been fans of the Santander Preferred Overdraft Rate Account which offers 0% interest on your overdraft for 12 months. You’ll need to pay £1,000 in a month to qualify and Santander says it will match your previous overdraft up to £5,000, depending on your circumstances. 

However, if you are going to apply for this account, make sure you do so in the next week or so because come March, this account will no longer be available. That’s because Santander is making some big changes to its overdraft structure - you can find out more in Santander to penalise disloyal customers.

The changes also mean that after the 12 months of interest-free overdraft is up, the Preferred Overdraft Rate Account will revert to a 50p per day overdraft charge with a 15 day per month cap – instead of the 12.9% interest rate it had previously reverted to.

As many of you know, however, Santander is not terribly popular when it comes to customer service. So if good customer service is a priority, take a look at First Direct’s 1st Account. First Direct is renowned for its excellent customer service, and with this account you’ll get a £250 interest-free overdraft. (Bear in mind you will need to pay £1,500 into the account each month or take out another First Direct product.)

Admittedly, it’s not as large an overdraft as that offered with the Santander account, but if you can keep your overdraft usage to a minimum, opting for this account is likely to save you a lot of hassle!

What’s more, if you take out the 1st Account, you’ll receive £100 cashback and if you’re not happy with the service within the first 12 months, you’ll get another £100 to leave!

*Based on minimum repayment of 2.5%, minimum £5.

More: Get a great current account | Five ways the ‘typical APR’ misleads us | The EU is bumping up your credit card bill