Savings rates are painfully low at the moment, while high inflation nibbles away at the value of your money. It’s a tough time to be a saver. So would your money be better spent repaying your credit card debt?
After all, if your money isn’t earning interest, perhaps it could be cutting the interest you pay elsewhere.
Peter Harrison, credit card expert at moneysupermarket.com, explained: “Saving is still important and it makes sense for households to keep some money aside for a rainy day, but where savings rates are low, canny consumers can look at alternative ways to make their money work harder for them, whether this is through earning interest or reducing it elsewhere.”
Credit card costs
Here’s an example. The average balance on a credit card in this country (excluding the ones that get paid off in full each month) is £1,989. If the cardholder only repays the minimum 2.5% each month, it will take them 22 years and 10 months to repay the entire balance.
During those decades, they will pay overall interest of £2,490 – a staggeringly high amount.
However, by paying an additional £20 a month, that would be cut by 17 years and slash the interest down to £857. So there’s a pretty good case for throwing that cash at the debt instead of into a savings account.
Peter continued: “We know that times are tight for many households and some credit cardholders may just be repaying the minimum amount every month as a way of trying to minimise their outgoings.
“However, our calculations send a clear message to those who may also have some savings - simply by paying off a bit more every month, as little as £10 or £20, their overall interest bill and the length of time it takes to clear the balance entirely can be dramatically reduced.”
But there are other ways to reduce the amount of interest you pay, freeing up some cash to help you clear your debt quicker…
Credit cards for balance transfers
Some credit cards offer you a 0% interest period on balance transfers and the leading deal just now is the Virgin Credit Card, which offers 16 months interest-free, plus a 2.98% fee.
After that period, you’ll pay 16.6% annual percentage rate (APR) on purchases, 18.6% on any remaining transferred balance.
The next best is the Barclaycard Platinum, which gives 15 months interest-free on balance transfers, for a 2.9% fee. The standard rate is then 15.9% for purchases and balance transfers.
Although these cards are great, they can catch people out. If you transfer a balance, but then use the card for purchases, you’ll need to clear the whole balance before you can repay the new debt that you’re being charged for. That’s because card providers set your repayments against the cheapest debt first.
Because of that, the new Virgin Credit Card Exclusive might be a cheaper option. It only gives you 12 months 0% interest on balance transfers (once again, for a 2.98% fee), but it also offers 12 months interest-free on purchases as well.
Once the first year is up, you’ll pay a standard APR of 18.9% on purchases and 21.9% on balance transfers.
If you think you’ll take longer than that to repay your credit card debt, maybe you’d be better off with a card that charges a consistently low rate.
One good example is MBNA’s 6.7% Low Rate card, which is the market-leading lowest rate. It doesn’t levy a balance transfer fee either, so some people will be better off switching to this.
The next best thing is Barclaycard’s Platinum Simplicity, which charges just 7.8% and also there is no fee for transferring a balance.
Where to save
So hopefully now you can cut the cost of your credit card without dipping into your savings. But interest rates are still low and inflation is still high, so you should move your money to a leading account to make sure you’re earning as much as possible.
The highest rates are available on fixed rate accounts, but if it’s rainy day money, you’re probably better off with an easy access account as most fixed rate bonds don’t allow penalty–free withdrawals during the fixed term.
The AA’s Internet Account Issue 2 is paying the leading rate of 2.80% and unlimited penalty-free withdrawals are allowed. There is a 12-month bonus of 2.30% though so you should look to move your money again after a year.
Also consider a cash ISA as interest is tax-free. You can invest up to £3,600 into a cash ISA before 5 April (£5,100 if you are 50 or over) and Santander’s Flexible ISA is the market-leader at 3.50%.
If you have money in cash ISAs from previous tax years that is no longer earning a competitive rate of interest, you can also transfer it to a better-paying deal without losing the tax-free status.
Not all accounts accept transfers though. Of those that do, Santander’s Direct ISA Issue 6 is paying the highest rate of 2.75% but only on balances of £9,000 or more. If you have less than that, Cheltenham & Gloucester and Birmingham Midshires both have accounts paying 2.70%.
Bear in mind that as soon as you take money out of a cash ISA, you lose the tax break on it so if you need to access your savings, you should use money in a non-ISA account first.
Need a little help?
If you’re struggling to make more than the minimum repayments, let alone saving money each month, it may be that you need some help with your debts.
Peter added: “It goes without saying that if you are paying just the minimum amount on your credit cards then you should seriously review your situation.
“If you cannot afford to increase the minimum payment, then you should perhaps consider speaking to one of the free debt advice charities such as CCCS or Citizens Advice as they will be able to review your circumstances.”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.