If you're sick of hefty debts and rising interest rates, then it's time to slash your borrowing costs to the bone.
Update: While writing this article, I noticed that the Bank of England held its base rate at 5.5% a year today. Keep your eyes peeled for further rate hikes in the coming months...
Ever since I became a financial writer (almost five years ago), I've repeatedly warned the public of the dangers of getting into excessive debt. Back in late 2002, British borrowers owed a total of £843 billion. By the end of April 2007, this figure had soared by more than half (57%) to £1,325 billion. What's worse, this millstone has been growing much faster than our incomes, as the following table shows:
Year-end | Total debt (£bn) | Disposable income (£bn) | Debt-to-income ratio (%) |
|---|---|---|---|
1999 | 615 | 609 | 101 |
2000 | 670 | 643 | 104 |
2001 | 741 | 686 | 108 |
2002 | 843 | 709 | 119 |
2003 | 954 | 740 | 129 |
2004 | 1,074 | 766 | 140 |
2005 | 1,176 | 805 | 146 |
2006 | 1,289 | 834 | 155 |
Apr 2007 | 1,325 | (estimate) 844 | 157 |
Throughout modern history, our yearly disposable income (take-home pay) has always exceeded our debt burden. Alas, in late 1999, our personal debt exceeded our income for the first time. Indeed, as a nation, we now owe more than 1½ times (157%) our annual take-home pay, which makes us more heavily indebted than our American cousins. In the words of Homer Simpson: d'oh!
Of course, roughly five-sixths (83%) of this pile is mortgage debt, which has swelled during an eleven-year house-price boom. Nevertheless, at present, we have £214 billion of non-mortgage debt, built up on store and credit cards, car and personal loans, overdrafts, store finance, etc. Divided among the UK's 25 million households, this comes to £8,560 per household.
What's more, the Bank of England has raised its base rate four times since last August, from 4.5% a year to 5.5% today -- its highest level since 2001. Naturally, lenders have responded by raising interest rates on mortgages, personal loans and credit cards.
So, British borrowers are being doubly clobbered by larger debts and rising interest rates. However, I can recommend an easy way to slash the cost of borrowing on credit and store cards. Simply transfer your existing debts to one of scores of credit cards which offer 0% balance transfers. By moving your balances to a 0% card, you can enjoy interest-free credit for up to thirteen months. However, you'll pay a transfer fee of 2% to 3% for all 0% deals lasting six months or more.
Then again, if you can't be bothered to be a 'rate tart', rolling over debts from one 0% credit card to the next, then the winning strategy is to transfer your card balances to a credit card which charges a fixed, low rate that lasts a lifetime. Check out these table-topping rates:
All lifetime balance-transfer deals (ten in total)
Card | Lifetime rate (% pa) | Transfer fee | Typical APR (%) |
|---|---|---|---|
Marks & Spencer Money &MORE MasterCard | 4.9 | Nil | 17.9 |
5.9 | Nil | 14.9 | |
GE Capital Bank Mothercare MasterCard | 5.9 | Nil | 19.9 |
5.94 | Nil | 15.9 | |
Sainsbury's Bank MasterCard | 5.94 | Nil | 17.9 |
Liverpool Victoria Banking Services CSMA Visa | 5.9 | 2% | 15.9 |
Liverpool Victoria Visa | 5.9 | 2% | 16.7 |
Leeds BS MasterCard | 5.9 | 2% | 17.9 |
5.8 | 2.5% | 16.9 | |
Goldfish i24 MasterCard (£275 annual fee) | 5.9 | Nil | 57.8 |
Source: The Motley Fool's independent, unbiased search engine.
As you can see, five of these ten credit cards charge no transfer fee, which pushes them to the top of my Best Buy table. Of the remainder, i24 gets the wooden spoon because this ultra-premium card charges an annual fee of £275. Of the above deals, my top picks would be M&S Money's 4.9% no-fee deal and Barclaycard Platinum's 5.9% no-fee deal.
By the way, DON'T be tempted to spend on any of these lifetime-transfer cards, as any purchases will attract interest at standard rates of interest (see column four of the above table) until your entire balance is paid off. My advice would be to hide these credit cards, so you won't be tempted to use them.
Finally, with the Bank of England's base rate expected to rise from its present level of 5.5% a year, these deals simply can't last. Indeed, since I wrote about lifetime balance transfers in April, the lowest rate (3.9% until 1 July 2010 from Morgan Stanley) has been withdrawn. So, grab these market-beating rates now, while stocks last!
> Check out the delightful deals in our credit card centre!
> The Very Best Balance Transfer Cards
> Do Credit Card Fees Stack Up?