Clear your debts for less

Starting 2020 in debt? Youâre not alone. The period before New Year is a prime time for borrowing to mount up, as many of us get swept away with the spirit of Christmas giving⊠not to mention those big fat festive parties.
If January feels like âthe morning after the night beforeâ for your finances, all is not lost. You may well find you can clear your debts quicker - and save money too - by following our 3-step action plan.
Step 1: Do the groundwork
To find the best way of managing your debts, you need to get a complete picture of your finances. Before you do anything else, make a list of how much you owe each lender. For each debt, note down:
1) What the APR is
2) How much you repay monthly
3) How many months it would take you to repay at the current rate
4) The total to repay (repayment amount x months left)
This will leave you clearer on your current debt situation, as well as giving you the information you need to work out the best strategy for dealing with it. Next, you need to create a budget. Once you understand how much money youâve got coming in and going out each month, youâll know how much youâve got leftover to put towards repayments.
To make this task simpler, try using a budgeting app or an online budget planner. Hereâs a planner we recommend from the Money Advice Service.
Step 2: See if you can save money by switching
You might be able to save money on your borrowing by âconsolidatingâ. This is where you transfer multiple debts to a single loan, by taking out a new loan to pay off the others. First shop around for a loan with a lower APR than the ones youâve got currently. The APR wonât give you the full story, however, so to find out for sure whether it makes sense to switch youâll need to compare:
1) the overall amount youâd repay if you stuck to your current borrowing, and
2) what youâd pay in total if you switched.
Add up the repayment totals for each of your current debts (see point 4 above).
Next ask your current lenders how much it would cost to pay off each debt early and in full (including any early repayment charges.) Added together, these figures will give you the new amount youâd need to borrow to consolidate. You can then use this handy loan calculator to work out how much youâd pay for the new loan in total.
If the new loan would cost you less overall than your current borrowing, itâs probably a good idea to consolidate.
When looking to consolidate, remember:
You may not qualify for every low-interest loan. Your credit rating will determine whether you can borrow at the lowest interest rates. But donât forget that at Bristol Credit Union weâre often able to help people who donât qualify for credit elsewhere, so consolidating with one of our personal loan could be a good option.
Make sure your new loan is unsecured. If you take out a âsecured loanâ, this means the loan company could sell your house if you fail to repay. Due to this risk, it doesnât make sense to use a secured loan to consolidate unsecured debts like personal loans and credit cards.
Consolidation options
Here are two possibilities that could save you money:
1) Balance transfer credit card
These cards offer a 0% or low rate of interest for a limited time when you transfer your debts. They can be a good option if you qualify, but they also come with risks.
You must keep up with the minimum repayments on a balance transfer card or else youâll be faced with penalties and could lose the cheap rate. Plus if you only pay the minimum each month, youâll likely still have a balance to pay when the cheap rate ends and the interest shoots up.
Balance transfer cards usually come with an upfront fee, which can add quite a bit to the cost of borrowing.
2) Bristol Credit Union loan
If a balance transfer card comes with a set-up fee of 3% or more, switching to a low-rate personal loan from BCU could end up costing you less overall - especially if you work for one of our Employer Partners. Our rates start from 6.9% APR and we donât charge set up or application fees.
Visit our loans page to find out more.
Step 3: Overpay the smart way
If youâve got enough money in your budget to repay more than the monthly minimums, overpaying to clear your debts earlier will almost always save you money - even if there are charges for doing so.
If youâve got enough money in your budget to repay more than the monthly minimums, overpaying to clear your debts earlier will almost always save you money - even if there are charges for doing so.
Check your T&Cs to find out whether overpayments are allowed, whether you have to notify your lenders in advance and how much you can overpay before youâre faced with penalties.
If you havenât consolidated down to a single loan, itâs time to start a âdebt avalancheâ. This is a strategic way of clearing debts that lets you repay faster and faster as you go - shortening the time youâre in debt and cutting the overall cost of repayment.
Hereâs how to do it:
1. Prioritise repayments - Focus on the debt with the highest rate of interest first.
2. Repay the maximum you can afford on your priority debt while making the minimum repayments on all the others.
3. Once youâve cleared your priority debt, move on to the one with the next highest rate of interest.
The key is not to reduce the overall amount youâre repaying as you strike off each loan. Keep paying your monthly minimums then use the rest of your repayment budget to overpay on your priority loan. This should be the quickest and cheapest way to clear your debts.
Are you looking to refresh your finances? You could consolidate your existing borrowing into one manageable loan from Bristol Credit Union. Visit our debt consolidation loan page to learn more.