Rush to cut debt as the crisis bites

By DAILY MAIL REPORTER
Updated: 17:09 EST, 31 March 2009

Borrowers are battling to get on top of their debts as they cut back on credit and crack down on their bills.

Consumers paid off £245million more debt than they took out in credit in February, the largest amount of net repayment since records began. It compares to the previous month's figures when borrowers took out an extra £165million in credit.

While getting on top of your bills is always a good idea, there is a knack to making sure you pay off the ones that cost you the most money first. It used to be the case that the first place to start would be credit card bills.

But in recent months the cost of overdrafts has risen higher than some cards. For example, Britain's biggest current account provider Lloyds TSB has overdraft rates ranging from 10.4 per cent to 19.3 per cent, and Nationwide BS has rates of 17.9 per cent.

Cutting back: Borrowers are trying to get on top of debts

Most credit card rates are between 15 per cent and 20 per cent. So check the small print on bills, then pay off the one that is costing you the most.

On most credit cards the cheapest borrowing is paid off first, and the most expensive - cash withdrawals, which are charged at around 25 per cent - last.

So while most of your credit card debt might be sitting on a lower rate than an overdraft, you may be better off paying the card debt so you can tackle the cash withdrawal borrowing quicker.

You shouldn't repay your credit card debt if you are on a 0 per cent deal - maybe as an introductory offer on purchases or on balance transfers. Let this borrowing sit on interest-free credit until it runs out, and then pay it off in full.

Next to repay for many will be personal loans. Though advertised rates start at around 7.9per cent, it is more than likely that you will be paying between 10 per cent and 12 per cent for your loan.

Be wary when trying to pay off unsecured loans early as sometimes they have early repayment penalties. It might well be cheaper in the long run just to keep making your agreed monthly repayments.

For most recent graduates their loan through the Student Loans Company is likely to be the most sizeable debt. But this is set in line with the rate of inflation each year, and so is essentially interest-free.

It also, for now, doesn't appear on your credit score and for most, repayments will come straight out of your salary. Repay it only when you have no other debts.