Cheap alternatives to credit cards
By Karen Murray, Moneyextra
2008
With credit cards now about as popular as a Turkey Twizzler but a heck of a lot
pricier, many borrowers are wondering where their next financial bargain is
coming from.
Interest rates on many credit cards have gone up substantially, by around 2% on
purchases and 3% for cash withdrawals giving interest rates of around 15.9% and
24.9% respectively - and sometimes a lot more - so, quite naturally, we are
turning away from them.
In August, credit card debt fell for the fourth month running, declining by £0.4
billion, while in the first half of 2006, more than 70% of plastic card
purchases were made using debit rather than credit cards. To put this in
perspective, in 2003, the split between debit and credit card spending was
roughly 50:50.
The jump in rates on credit cards appears to be the result of the ruling earlier
in the year by the Office of Fair Trading (OFT) ordering credit card issuers to
cut their penalty fees on late payments and the like to now more than £12.
To recoup their income, card issuers pushed up interest rates. The fact that we
Brits are the heaviest borrowers in Europe owing an average of £3, 175 each in
unsecured debt, double the average in other countries, seems to be getting to us
because unsecured lending has been falling as we pay off debt.
With fewer of us using our credit cards, what are the alternatives ways of
obtaining cheap finance for everyday purchases?
* It is still possible to find good credit card deals. Check out this week’s
best rates
|
Overdrafts
Consider the overdraft as a cash management alternative to the credit card. As
long as you keep within your authorised overdraft limit, overdrafts can be a
good way of managing your budget and your debt.
Interest rates vary between 7.9% and 15.9% but overdrafts are flexible and you
can borrow when you need the money and pay it back without paying a redemption
fee. Some banks give you a free overdraft for a certain amount or period, which
is always worth having.
However, some banks charge a fee for setting up your overdraft and if you go
over your overdraft limit, beware: it can cost you dear. The interest rate for
going over your authorised limit is much higher, often at around 30% and there
is likely to be a fee to pay as well.
* This week's best rates on current accounts
Apply Now For Debt Consolidation
Combined accounts
Another alternative is the combined current account, which links your savings,
mortgage and current account.
Your mortgage and other personal debts are linked, you pay them both at the same
interest rate and you can borrow when you need to. However, these combined
accounts work best if you have substantial savings.
Personal loans
While personal loans appear cheaper than overdrafts and credit cards with
interest rates as low as 5.7% with Masterloan and Northern Rock, the problem is
that you may well be turning short-term debt into long-term debt. Personal loans
can be over one to 15 years and the longer the loan, the more interest you pay.
The best way to compare personal loans is to look at the annual percentage rate
(APR) but there are other matters to consider such as arrangement fees and
payment protection insurance - another scandal in the making! Always make sure
you are comparing like with like. The advantage of a loan is that it will be at
a fixed rate so you will be paying the same amount each month.
Loans can be unsecured, which means the lender has no guarantee if you can't
make the repayment or secured, which means the lender has a hold over your home
if you default. Secured loans are like second mortgages and are not suitable for
short-term finance.
* This week's best rates on loans
Don’t cut up your card just yet
Unlike overdrafts, you also get an interest-free period, sometimes up to 59
days, giving you a nice soft cushion. And they can be good for paying for higher
value goods as long as you work out a budget pay it off as quickly as possible.
As a rule credit cards are not a good way of getting hold of cash. There is a
fee for withdrawing cash, usually 2% to 3% of the amount withdrawn plus a flat
fee of £2 or £2.50 for using an ATM and a higher interest rate so they should
only be used in desperation.
This is where, of course, the overdraft has the advantage, perhaps showing that
when it comes to getting the most out of your cash management borrowings for
everyday spending, pick and mix is the best option.
Apply Now For Debt Consolidation
Courtesy:
http://money.uk.msn.com/loans/articles/article.aspx?cp-documentid=4750140
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