January is rarely the most enjoyable of months and for thousands of credit-card borrowers, the bills that are due to arrive in a couple of weeks’ time are only likely to make matters worse.
The January financial blues
This time of year is when debt problems are brought most sharply into focus: higher-than-normal spending over the Christmas and New Year period is of course the main culprit. But the common practice of bringing December’s payday forward by a week or so also has its drawbacks, with more people than usual likely to be running out of cash well before January’s wages appear in their accounts.
As ever when it comes to your finances, it pays to be prepared. So rather than getting a nasty surprise when your card bill turns up at the end of this month, it’s a good idea to work out as early as possible exactly how much you owe and how you’re going to pay it off.
Minimum repayments - only a short-term solution
Repayments on credit cards can be a double-edged sword: most lenders only compel borrowers to make a minimum monthly repayment, typically 2.5% or so of their total balance. If you owe £10,000, for example, you’ll only have to pay this down by £250 each month – although you can of course pay more if you like.
If you’re being charged interest on your debt, however, paying off just this minimum chunk of it will only store problems up for the future. At a typical APR of 20%, your £10,000 debt would grow by more than £150 a month, offsetting most of the benefit derived from your repayment.
If you can’t afford these minimum repayments, that is a good sign you are facing debt problems – the same applies if you are regularly using other forms of credit to clear your balance, for example by dipping into your current account overdraft.
Getting a balance-transfer credit card – pros and cons
Switching to a card that allows balance transfers and then charges no interest for several months could be one option for helping to get your financial affairs back in order. But the market-leading balance-transfer cards tend to be reserved for people with spotless credit records – and there is also the risk that you could lose your interest-free perks, for example if you miss a repayment.
Finally, a balance-transfer card doesn’t necessarily clear your debt: it just gives you some breathing space.
When to consider a debt consolidation loan
These reasons mean it is worth considering some form of debt consolidation such as a personal loan. This kind of credit lets you borrow money to pay off more expensive debts, such as cards and overdrafts, and then pay a fixed monthly amount for a pre-defined period of time – at the end of which, your debt is paid off.
Zopa’s calculator illustrates how much you may save by consolidating. All you have to do is input the size of your current debts and the interest you’re being charged, as well as how much you are managing to pay off every month.
Rates on personal loans, especially arranged via peer-to-peer platforms such as Zopa, are near all-time lows at the moment. Why not use the calculator to see if it’s worth taking advantage?