How much do you owe?

Do you know the exact amount you owe to banks and other lenders once your mortgage, overdraft, credit cards and loans are all taken into account?

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While you might be able to take an educated guess, the answer is probably no.

Figures from MoneySupermarket indicate that a massive 34million Britons currently borrow via a credit product of some kind.

But recent research from credit reference agency Equifax found that one third of the people who fail to clear their credit card debts each month do not know how much they owe on their plastic.

And that’s before counting up other debts such as current account overdrafts and loans.

Failing to keep up to speed with how much you owe, however, could allow your debts to get out of hand.

And it would also make it virtually impossible to ensure you are paying as little interest as possible, especially if you have different types of credit.

The Equifax research also showed that more than 50% of those with outstanding credit card balances were ignorant of the interest rate they were paying on those debts.

Here we show you how to work out exactly how much you owe in total and highlight ways to reduce the cost to you by switching to the cheapest products.

How to calculate your debt burden

If you are keen to get a handle on your debts, the first step is to sit down and work out how much you owe in total.

To do this you will need up-to-date statements for all the mortgages, loans, credit cards and overdrafts you have outstanding.

If for any reason you cannot find your latest statements, you should be able to get these figures from the lenders concerned.

You then need to take a deep breath and add them all together – but remembering that mortgage debt, for example, is secured against your home and does not necessarily have to be cleared before you sell your property.

How to reduce your debts

Once you have worked out how much you owe, the chances are that you will want to reduce the total.

One way to do this is use any available savings to pay some or all of it off – particularly as the interest rate you are likely to be paying on standard credit cards, overdrafts and loans is probably much higher than the interest you are receiving on your savings at the moment.

Using any spare disposable income you have to increase your loan repayments where possible is also a sensible measure.

If you do not have the savings to pay off your debts in full, however, the best way to reduce the amount you owe is to ensure that you are paying as little interest as possible.

This way, even if you keep your repayments at the same level, more of the money will go towards reducing the amount that you owe to the bank or lender in question.

That’s why we have scoured the market for the best options, whether you are looking for a credit card, mortgage, loan or overdraft.

Loans

Personal loans are a great way to consolidate debts – especially if you are a perhaps a bit short on financial discipline.

This is because – unlike credit cards – they are for fixed amounts of money and come with fixed monthly payments, so they impose the discipline for you.

What’s more, the good news for those looking for a personal loan at the moment is that several providers have slashed their representative APRs to less than 6% on amounts of between £7,500 and £15,000.

Nectar cardholders can pay as little as 5.8% on a Sainsbury’s Finance loan – the lowest personal loan rate since November 2006.

And even at 6.0%, £7,500 will cost just £8,667 over five years, compared to £9,085 at 8.1% (the average market leading rate in December 2008).

Remember though that these great rates are only open to those with high credit scores.

Tim Moss, head of loans and debt at MoneySupermarket, said: “Those without excellent credit histories continue to be charged significantly higher rates of interest."

Mortgages

With the base rate at just 0.50%, you might think that you will not lose out by sticking with your mortgage lender’s standard variable rate (SVR).

However, a number of lenders have raised their SVRs this year, despite the base rate remaining at the same level.

And there are some great rates available. You can, for example, pay as little as 2.64% on a fixed-term tracker from HSBC with a £999 fee – as long as you have equity of at least 40%.

When it comes to fixed rates, meanwhile, Leeds Building Society has a three-year deal at 3.25%, also with a £999 fee. It requires a minimum deposit of 25%.

Credit cards

The average representative APR on a standard credit card now stands at 17.31%, meaning a balance of £3,000 therefore attracts interest of over £500.

But switching that balance to the market leading Barclaycard Platinum credit card offering 22 months at 0% on balance transfers (subject to a 2.9% fee) would save you interest of £696 over the term of the interest-free deal.

Kevin Mountford, head of banking at MoneySupermarket, said: "A balance transfer credit card could be a good option for those with existing debt on other cards."

Overdrafts

The Equifax figures show that around a third of Britons go overdrawn every month.

If that sounds familiar, but you rarely dip into your overdraft by more than £200, an account with a buffer zone, such as First Direct’s 1st Account, could prove a good option.

It allows you to borrow £250 interest-free, after which the arranged overdraft rate of 15.9% kicks in.

There is a £100 switching incentive on the account, but it does not pay any credit interest and is only open to those who pay in at least £1,500 a month.

Like some other banks, First Direct allows you to ‘offset’ your current account against a mortgage that you have with the bank.

In brief, this means the amount you have in credit in your current account is notionally knocked off the amount you owe when the interest is calculated, reducing your interest payments.

Calculations are made daily, so any period when you are in credit will work to your advantage.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We’re free, independent and compare all UK credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2011.

 

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