This content originally appeared in the MSE weekly email on 14 October 2015.
The credit crunch is well and truly dead and buried. We've now had 79 months in a row of 0.5% UK interest rates & with the global economy still gloomy, providers are pricing long-term debt cheaper than ever before.
So if you need to borrow or cut the cost of existing borrowing, this is a great time. Yet the one fly in the ointment is while deals are better than pre-crunch times, they're harder to get. So here are my key 12 need-to-knows...
1. Is it worth borrowing? Unless you're a super savvy stoozer, only do it if you really must. If you already have debt, do try to cut its cost.
- Just funding your ongoing lifestyle? This is the worst type of borrowing as it means you're living beyond your means and risk a debt spiral. Avoid it. Use the Free Budget Planner, stop spending and cut your cloth accordingly.
- For a needed, planned purchase. (Eg, a car for a new job, or annual car insurance as it's cheaper than monthly.) Minimise the amount & repay quickly to keep interest low & only do if repayments are affordable.
2. Will you get accepted for top deals? It depends on your credit score. The only way to find out is to apply, but that leaves a footprint on your credit file. Too many, especially in a short time, hurt future applications. Use our free credit card eligibility calcs and loans eligibility calc to see your odds of getting a card or loan pre-applying. If you're struggling to get accepted, see my 36 tips to boost your credit score.
3. The cheapest way to borrow is a 26mth 0% spending credit card. With no interest and no fee, this is without doubt the cheapest way to borrow, if: a) you can pay what you need on plastic; b) you can clear the debt in the 0% time; and c) you follow the golden rules below.
The Clydesdale*/Yorkshire* 26mth 0% spending card is the longest ever. It's followed by Post Office's* 25mth 0% (provided you spend on it within the first 3mths). Try the 0% spending eligibility calc, and ensure you follow the golden rules...
- Repay/shift debt before 0%s end or they jump to 18.9% rep APR.
- Pay at least the monthly min, or you lose special rates.
- Don't withdraw cash – it's not at 0% and can harm your credit score.
4. The cheapest loan is now 3.4%. If you want to borrow more, borrow longer, or want the discipline of fixed monthly repayments, then personal loans win. Use the Loans Eligibility Calc to find which you've best odds of getting.
For £7,500 to £15,000 loans Sainsbury's* is 3.4% rep APR over 1-3yrs for Nectar card holders (if not, get one free first) and over 4-5 yrs* 3.5% rep APR. M&S* is 3.5% rep APR over 1-5yrs. For less, two lenders dominate.
- £5,000-£7,499: Zopa* 4.3%-4.4% rep APR, Hitachi* 4.4% rep APR
- £3,000-£4,999: Zopa* 4.6%-6.9% rep APR, Hitachi* 7.4% rep APR
- £2,500-£2,999: Zopa* 6.9%-7.4% rep APR, Hitachi* 7.4% rep APR
- £2,000-£2,499: Zopa* 6.9%-7.9% rep APR, Hitachi* 12.3% rep APR
- £1,000-£1,999: Zopa* 7.7%-7.9% rep APR, Hitachi* 12.3% rep APR
5. Nationwide customer? You can get loans, as low as 2.9%. If you've got a Nationwide current account (or switch to one) and are accepted for a loan from any bank or building society (incl Hitachi but not peer-to-peer lenders Zopa/Ratesetter), take proof to Nationwide and it'll beat it by 0.5 percentage points if you also meet its criteria. So 3.4% becomes 2.9%. Full Nationwide loan trick info.
6. 24mth 0% loans for smaller amounts (for a fee) from a credit card. If you need cash (eg, to pay off an overdraft) or to buy something you can't put directly on a card, the winner's a 0% money transfer credit card. These rare cards pay cash into your bank, and you owe them.
New MBNA 'up to' 24mth 0%* cardholders (eligibility calc) get it for a one-off 1.89% fee (roughly £19 per £1,000 – far cheaper than loans). For longer, this MBNA 'up to' 36mth 0%* (eligibility calc) has a higher 2.99% fee.
7. Shift existing credit card debts to 20mths 0% NO FEE or 37mths 0% (2.69% fee). If you need to cut credit card debt costs, use a balance transfer deal. This is where you get a new credit card that repays these debts for you, but at a cheaper rate. Choose the lowest fee, provided you're sure you can repay in that time...
- Halifax* 'up to' 20mths 0% NO FEE (18.9% rep APR after).
- Post Office* 'up to' 26mths 0%, one-off 0.4% fee (18.9% rep APR).
- Barclaycard* 'up to' 37mths 0%, 2.69% fee (18.9% rep APR).
- Halifax* 'up to' 37mths 0%, 2.75% fee, for transfers of £1,500+ it beats Barclaycard as it gives £35 cashback (18.9% rep APR).
a) Use the eligibility calc to find your best acceptance chances.
b) Repay at least the set monthly min, or you can lose 0% rates.
c) Clear the card or shift again before the 0% ends, or rates jump.
d) Don't spend/withdraw cash. It's not usually at the cheap rate.
8. Beware 'representative APR' – it means 3.4% can be 20%. You'll see all cards & loans have a 'rep APR' or 'representative APR'. This means only 51% of those accepted need to get the rate lenders quote or advertise. The rest can be charged anything, there's no limit.
It's very hard to crack this. Our loans eligibility calc and cards eligibility calcs can't do it, but as a very loose pointer, the higher the acceptance chances the better hope you have of getting the rate.
9. Beware the 'up to' 0% too. If we add the words 'up to' to a 0% offer, it means only 51% of those accepted may get that length. Unlike 'rep APR' this isn't a regulated term, it's our term, sometimes we only find out by the small print. So if all things are equal (including credit card eligibility calc score) – go for the card that isn't an 'up to' to be sure.
10. 'I've got a score of 60% with the eligibility calc – is it worth applying?' I'm often asked this. Actually 60% is still pretty decent as odds go – in other words, more than half the people in your position get accepted, not bad at all.
All you risk by applying is a footprint on your credit file – that'd only have a minor effect (it's multiple applications that hurt). So consider how important the deal is, eg, if to cut debt costs it's significant.
11. Struggling? Are you eligible for a Government 0% loan? If you're looking at horrid debt such as payday loans, try these instead. There's no credit check, but they will check you can repay. Local council support schemes are for those in emergencies with no savings; budgeting loans for those on some benefits to help meet essential living costs.
12. Credit unions can give loans to those who'd pay high rates elsewhere. Credit unions are small savings and loan co-operatives for communities. They usually lend from £1,000 to £10,000 – APRs are typically about 13% but can be higher (though they're capped at 42.6% APR). Find your credit union.
Worried about your debts? Debt is like fire, it's a useful tool, but get it wrong and it burns.If you can't meet minimum repayments or aren't sleeping due to worry, read my Debt Crisis Help guide or get one-on-one non profit help from Citizens Advice, StepChange, National Debtline or, for emotional help too, CAP.
They're there to help, not judge, many people's first comment to me after is"I finally slept last night." Read some inspiring stories in our Debt-Free Wannabe forum and also my Mental Health & Debt guide.