An Easy Way To Shrink Your Debts

Here's a simple method to reduce your credit card and overdraft balances by hundreds (even thousands) of pounds.

"Debt is the slavery of the free."

The above quote comes from Publilius Syrus, who lived in the first century BC.

Publilius Syrus was taken from his home in Assyria to become a slave in Italy, but was later freed and educated by his master, who was impressed by his wit and talent for acting. So, having been the property of another man, Publilius Syrus became a free man, but wisely observed that some men have more freedom than others!

I know exactly what he means, having laboured under a weighty debt burden throughout the Nineties. Indeed, at one point, my non-mortgage debts totalled around £50,000 and most of my wage went on servicing these. In effect, I spent most of my time working for lenders. Aargh!

I'm now a reformed character and "don't do debt", preferring instead to save and invest my money. However, the rest of the UK has succumbed to the borrowing bug, with unsecured debts hitting a record £212 billion at the end of last year. On average, this comes to roughly £8,500 for each of the 25 million households in the UK -- a burden which most of us could do without.

Around three-tenths (30%) of total unsecured debt - about £66 billion -- is made up of credit- and store-card balances and current-account overdrafts. What's more, card issuers, banks and building societies make billions of pounds by fining customers who exceed their credit limit, miss a payment or pay late, or bounce a cheque or other payment.

For example, as I revealed in Britain's £10 Billion Overdraft Bill, banks and building societies make an estimated £3 billion a year from overdraft penalties. This comes on top of the £1.1 billion a year which they make from charging interest on unauthorised overdrafts, often at rates of around 30% a year.

Card issuers make equally obscene profits from these fines, which also add billions of pounds to our overall debt. These fines go a long way towards explaining why the UK's big five banks (Barclays, HBOS, HSBC, Lloyds TSB and RBS/NatWest) may have made a combined profit of £40 billion in 2006!

So, my tip for today is simplicity itself: reclaim these fines and use this refund to reduce the outstanding balances on any credit cards and overdrafts. As we explained in The Ultimate Guide To Reclaiming Bank And Card Charges, these fines can amount to £12 to £40 per offence, so they soon add up to a tidy sum.

However, the Office of Fair Trading, the Financial Ombudsman Service and the courts consider these charges to be excessive and, therefore, in breach of the Unfair Terms in Consumer Contracts legislation. Thus, with a bit of persistence and a few template letters provided by the Fool, you can force your bank to repay all of these penalties going back six years.

Let's say that you've been fined £25 every other month for the past six years. In total, this comes to £900, but once you've added on interest at the prevailing rate which you paid (perhaps 20% to 30% APR), this could easily exceed £1,200. Now how often can you earn over a grand for perhaps a couple of hours' work? Fight back by grabbing your refund today!

More: Use the Fool to find cracking credit cards and charming current accounts