Five ways to slash your interest bill in 2010

Tackle your debt bogeyman with these interest-bashing tips!

A new study - by money education charity Credit Action - has revealed that interest charges make up an enormous percentage of many people's outgoings. And it seems that interest payments play a huge part in preventing people getting out of debt.

In the last 12 months, Britain's interest repayments on personal debt were a whopping £66 billion. The average interest paid by each household on their total debt is thought to be around £2,620 every year.

And according to professional services firm PwC, the average household will need to spend around 15% of net income purely to service the interest payments arising from their debt. Those are all very depressing statistics.

If you're paying interest on your debts, it's time to fight back. Fortunately, there are several options open to you.

1. Switch to a 0% credit card

If you're currently paying interest on credit card debt, it could make financial sense to move that debt onto a credit card that offers 0% interest on balance transfers for a certain period of time. This may give you the breathing space you need to clear that debt completely, whilst not being hampered by interest charges.

I think the best 0% balance transfer card around is still the Virgin Money credit card. It offers 0% interest for 16 months; the longest 0% deal on the market. Alternatively, there's the Barclaycard Platinum with 15 Month BT Visa which offers 0% on balance transfers for 15 months.

However, when applying for a 0% balance transfer card, there are certain things to bear in mind:

 - The longest deals all require you to pay a one-off balance transfer fee (2.98% for the Virgin card).

 - You'll probably only be successful in your application for a card like this if you have a very good credit rating.

 - And finally, you need to be absolutely sure you can clear the balance before that 0% period ends. If you don't, you will probably be charged a high level on interest on the remaining debt.

It's worth noting that a few 0% balance transfer cards - including the Virgin offering - will allow you to slash your interest bills on other, non-credit card debt (like overdrafts or personal loans). This is through a process called 'money transfer'. You can find out more about that in this article.

2. Make a 0% purchase credit card work for you

When you buy certain financial products - like a year's worth of insurance - you may be given the option of paying for your cover in monthly installments.  This sounds great in theory, but these sort of graduated payments usually have a nasty sting in the tail in the form of enormous interest charges. You might end up forking out interest at a rate of 30% APR, or even more.

You can dodge this extra cost by paying the full amount right at the beginning. If you're unable to find that large sum, consider taking out a credit card that offers 0% interest on new purchases.

The longest 0% purchase deal around at the moment comes with the Tesco Clubcard credit card. It gives a full 12 months spending, interest-free - followed by a typical APR of 16.9%.

So, use your 0% purchase card to pay your insurance premium in full - and then pay off the balance of the card gradually, over several months. Providing you clear your debt completely during the 0% period, the whole transaction should be interest-free.

3. Find a better current account

Many of us stick with the same current account all our lives, even though it doesn't really meet our needs.

Are you being charged interest on your overdraft? Finding a new account - with a decent 0% overdraft facility - is a really simple way to slash your interest payments. So don't let inertia get the better of you!

If you're frequently in the red, one of the best current accounts on the market is the Premier Account from Alliance & Leicester, which offers a 0% overdraft facility of up to £2,000 for the first 12 months.

At the moment, the account is also offering a £100 bonus to customers switching across to it. This £100 offer is set to end in the first week of March, so you'll need to act fairly quickly if you do want to take advantage of it.

As always, terms and conditions apply: To get the offer, you'll need to pay in at least £500 every month. You must also switch all your direct debits across to the account.

And remember that after 12 months you'll start being charged for having an overdraft (50p per day for authorised overdrafts, up to a maximum of £5 per month) - so when your first year is up, it may make sense to switch accounts again.

4. Cut the cost of your personal loan

When it comes to taking out a personal loan, you may think the Annual Percentage Rate (APR) quoted is the only thing you have to worry about. In fact, it's not as simple as that. When trying to keep your interest charges low, there are several other factors to think about as well.

First, it's important you take into account the Total Amount Repayable (TAR). The TAR will include any compulsory fees you'll be charged as well as the interest you'll end up paying - so it will give you a much clearer idea of whether the loan you're offered is really a good deal.

Second, watch out for any 'payment holidays' you're offered. These aren't as lovely as they sound, because although your payments will be put on hold, your interest charges won't be - so all the while the interest you're charged will be racking up.

In a nutshell, it's crucial you borrow the minimum amount necessary, and pay it off as quickly as possible. For more tips on keeping personal loan charges low, read Seven simple steps to shopping for a personal loan.

5. Snowball your debts

Finally, there's an excellent way to tackle your interest payments that doesn't rely on your credit rating, or on particular financial products.

'Snowballing' is a debt repayment strategy that helps you tackle your most expensive debts (those charging the highest levels of interest) first.

Because your priciest debts get paid off first, your overall interest bill should come right down. It will also mean that the amount you're able to chuck at your remaining debts will grow, like a snowball rolled down a hill!

Just remember that you still need to keep up with the minimum repayments on all your debts, otherwise the penalties you'll face will outweigh any savings you make.

For a complete guide to snowballing, read this task in our 'Destroy Your Debt' goal.

Get help from lovemoney.com

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First, adopt this goal: Save money every day of the week

Next, watch this video: How to deal with debt disaster

And finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

More: Obliterate your overdraft for good! | Love can save you money!