The Spiralling Cost Of Debt

Find out just how expensive your loans, credit cards and overdrafts are becoming.

Here's a cheery subject. We have talked about people's rising debts, which have been triggered largely by a sustained period of low interest rates. Now, as debts spiral out of control for many people, so rise interest rates charged by lenders.

Nineteen credit card companies have increased rates on 25 cards by as much as 6% in the second half of this year. Compare this with savings interest rates, which have gone up by no more than 0.5% on average!

You really should look carefully now at how much you pay, because the difference between typical cards and the cheapest cards is huge. No one should have balances on cards that have interest rates of 16% or more! Not when you can switch between 0% interest deals, or low-interest rates (low standard APRs or low lifetime-balance transfer rates).

Overdraft rates have also been pushed up considerably. In September, NatWest announced an increase to overdraft rates by more than 1% on all its accounts; for example, overdrafts of under £1,000 were charged at 17.69%, but this went up to 18.86%. Now it has announced a further rise from 2 January. Overdrafts under £1,000 will now cost 19.99%. (Let's call it 20%, shall we?) Therefore, in the space of a few months, its overdraft rate has gone up 2.3%, which is more than four-and-a-half times the recent Bank of England base rate rises!

Lloyds has also increased its overdraft rates twice now in three months. The worst current-account increases were to its Classic Plus account, which went up in September from 15.5% to 18%, and this week up again to 18.3%.

If you typically have an overdraft of about £500, you could save about £100 in a year if you switch to Alliance & Leicester's Premier Direct account, which offers overdrafts of up to £2,500 interest-free for a year, which then goes up to a very competitive 5.9%. Pretty much any bank has better overdraft and credit interest rates than the big four: check out the competition here.

Onto loans now. Cahoot's much admired flexible loan is now closed to new business. Existing customers looking to pay off their debts early are getting a raw deal, as Cahoot announced an increase of a whopping 6% in interest rates in two rapid stages: from 8.9% typical to 9.4% on 6 Dececember and again on 19 December up to 14.9%.

NatWest has its FlexiLoan allowing lump sum or early repayments. The downside is that the bank doesn't even advertise what the typical rate is, which means it will almost certainly not be on a par with Cahoot's previous rate. Also, you'll probably pay an arrangement fee (although you should attempt to negotiate).

You have some flexibility with Egg loans though. You can make lump sum payments as easily as with Cahoot, but you can increase or decrease your monthly payments without penalty. The typical APR is 7.8%, with the added bonus that the rate is fixed.

One more thing on loans. Remember not to take out insurance with it. If you want to protect your payments, get much cheaper stand-alone insurance, or the very Foolish income protection insurance.

There's good news for mortgage rate tarts though. The best mortgages remain very cheap at present, with surprisingly little movement considering the increases to Bank of England rates. However, you can still save thousands of pounds by comparing mortgages and switching, especially if your introductory deal has expired...But no Fool is actually paying his/her mortgage lender's standard variable rate!...Are you?

Finally, if you're not entirely sure how bad your debts are and are concerned about Christmas, have a read of The Warning Signs Of Debt Problems.