Paying back loans, credit and store card debt faster could save you a lot of money. However, you need to look at your whole financial situation before you decide the best approach.
What’s in this guide
If you want to reduce your borrowing
If you want to reduce your loans or credit card balances and are worried that you might miss repayments and fall into debt, it might be helpful to consolidate them. But only consider this if any savings aren’t wiped out by fees and charges, you can afford to keep up payments, and you use it as an opportunity to cut your spending and get back on track.
You should end up paying less interest than you were paying before and the total amount payable is less (it could be more if you repay over a longer period).
If you’re already missing payments, see how to prioritise your debt. Or seek debt advice – use our Debt advice locator tool to find free and confidential debt advice online, over the phone or near to where you live.
If you’re facing higher living costs, find out about extra sources of income and support in our section Help with the cost of living
Paying off your loans
If you’re paying more for your borrowing than you’re getting on your savings, it makes sense to pay off your loans, credit or store cards – as long as you can access funds in an emergency and you won’t be charged high penalties for repayments.
If you have several loans to clear, aim to clear the most expensive ones first. These are the most common examples:
most credit cards
store cards
unauthorised overdraft
catalogue shopping
payday or short-term loans
door-to-door lending (home credit).
If you’ve overspent but aren’t in debt
If you’ve been spending more than you should and are juggling two or more types of borrowing – such as credit cards, store cards, personal loans or overdrafts – it’s a good idea to get things back under control before you get into debt.
The first step is making a note of the interest you’re paying on your credit, store cards or personal loans so you know which is the most expensive.
Then take control of your money by working out your living costs and making a budget – so you know what’s coming in, what’s going out, and when. This will give you a clear picture of where your money goes and shows you where you might have a chance to save money.
If you’re worried about missing payments, set up a regular Direct Debit or standing order to make sure you keep on track.
It’s important to understand which bill payments to prioritise. Use our Bill prioritiser to help manage your payments.
Pay the most expensive borrowing first
If you have store cards, credit cards or a personal loan, the store cards will probably be the most expensive. So it’s important to make sure you pay these off first.
Credit cards also charge varying rates of interest. You can find the rate on your credit card statement.
Of all your borrowing, pay the most on the one with the highest interest rate first. This will vary depending on what kind of balances you have on the card – purchases, balance transfers or cash withdrawals.
Make sure you pay at least the minimum payment on all your cards, otherwise you’ll face charges and damage your credit rating.
Paying more than the minimum card payment
Paying the minimum amount each month can make it feel like what you owe on your loan or credit card is affordable. But even if you’re on a 0% rate for an introductory period, paying just the minimum will make only a small impact on your debt.
If you only paid the minimum payment on an outstanding balance of £2,000 with an annual percentage rate (APR) of 18%, it would take you 34 years to pay it back. You would pay £3,983 in interest.
It will also show up on your credit report. Other companies might assume you’re struggling and will be more reluctant to lend you money. This could even affect your chance of getting a mortgage in future.
If credit card interest is higher than loans
If you don’t pay off your balance at the end of the month, and you’re not in a 0% introductory period, you’ll have to pay interest on your outstanding balance. The interest rate on credit and store cards can be a lot higher than for a personal loan.
Always try to repay as much as you can. Even if you only increase it by a small amount each month, it can make a huge difference.
Get a balance transfer card
If you have a good credit rating, you might be able to move your current credit card balance to another credit card offering a low or 0% deal.
There’s usually a fee to pay for this of between 2% and 4% of the balance transferred. Be aware that you need a good credit rating to qualify for the best deals. If you have a poor credit rating, find out how to improve it in our guide How to improve your credit score.
Make higher affordable payments
Credit card providers must contact people who have made very low or minimum payments on their credit cards for the past 18 months to suggest higher affordable repayments.
This is because people in this situation will have paid more in interest, fees and charges than what’s been paid back on the balance.
If you don’t respond, or ignore the issue, and the situation persists for more than 36 months, your account could be suspended. Your creditor could also take enforcement action against you.
Should you save, or pay off loans and credit cards?
If you have savings, it might be worth repaying some of your loans or credit cards – but only if you will still have some savings set aside for emergencies and it doesn’t end up costing more in fees.
High interest charges on the most expensive forms of debt make it harder to put money aside, so clear these first. You’ll rarely be able to earn more on your savings than you’ll pay on your borrowings. So plan to pay off your debts before you start to save.
Make sure you understand what interest you’re paying on your different loans, so you know which ones you’re paying more for.
Build an emergency fund
Ideally, it’s a good idea to have at least three months’ money in reserve as part of your emergency savings. But if you have debts use the money to clear these first, provided you have access to emergency funds such as a credit card. If an emergency arises and you have to you go for this option, it’s important not to start using the card for other purchases, as you’ll risk running up yet more debt.
What about paying off your mortgage early?
If you have cash to spare, you might think about reducing your mortgage. However, depending on your circumstances, there are some other questions you need to ask yourself. For example, do you have other, more expensive, debts – where the interest rate is much higher than the cost of your mortgage borrowing?
Credit cards and catalogue accounts, for example, charge a high rate of interest over a year, and you would want to pay these off first.
For more information, see our guide Should I pay off my mortgage early?
