If you'd like to give your finances a facelift, start by crushing your credit-card debts. We show you how.
At the end of 2005, there were almost 75 million credit and charge cards in issue in the UK, but only 48 million adults. Given that a third of adults don't have a credit card, this means that the remaining 32 million people have, on average, more than two credit cards apiece.
What's more, we like to borrow on our plastic. According to the Bank of England, at the end of January 2007, British borrowers owed £55 billion to credit-card issuers. Alas, more than three quarters (76%) of this debt attracts interest. The bad news is that the typical interest rate on credit card purchases is around 17% a year, or almost twelve percentage points above the Bank of England's base rate of 5.25% a year. Ouch!
To me, these data suggest that we Brits aren't terribly good at managing our 'flexible friends'. Actually, given the billions of pounds which credit-card companies make each year, I prefer the term 'plastic parasites'!
If you believe that you have a tendency to overspend which is worsened by having credit cards, then your first step is to learn to live within your means. This means turning your back on credit, relying on your income to make ends meet, and putting in place a plan to repay your existing debts. A good first step is to chop up your credit cards, ideally into lots of little pieces. Actually, pulping them inside a robust blender looks great fun; watch 24 cards in one go in this video from the Will It Blend? website!
Once you've got rid of your cards, you can then turn your attention to killing off your balances. To do this, you must cut your interest rates and increase your monthly repayments. You can slash your interest rates in two ways: by demanding a better rate from your existing card issuers, or by transferring your debts to a low-rate or 0% credit card.
Among credit-card issuers, there is fierce competition for customers, so your existing lender may be reluctant to see you leave. Try calling it and demanding a cut in your interest rate, otherwise you'll transfer your balance elsewhere. Unless your credit record is poor, this should lead to you paying a reduced rate. You should aim to get your interest rate under 10% APR as a simple first step.
If your credit history is fairly good, then you could try transferring your balances to a low-rate deal. Several companies offer lifetime balance transfers at rates of less than 6% a year. By paying a lower rate of interest, your monthly repayments chip away at your debt faster, which brings forward your debt-free day.
If you want to go the whole hog, you can become an outright 'rate tart' by playing the 0% balance-transfer game. More than fifty card issuers offer interest-free credit on transferred balances for introductory periods lasting from five to thirteen months. However, you should watch out for transfer fees on 0% deals which last six months or more.
Finally, it worries me greatly that one in nine cardholders (11% of us) usually pay only the minimum monthly repayments (MMRs) demanded by their credit cards. As I warned in Turbocharge Your Credit Card Repayments, it can take decades to repay even a modest debt by paying only the bare minimum each month. So, if you don't want your debts to last a lifetime, avoid MMRs at all costs -- unless you're a 0% tart, of course!
More: One Good And One Bad Credit Card | Watch Out For That 0% Credit Card!