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The past couple of years has seen a sharp divide across UK society.  Some people have found themselves with disposable income to pay off debt.  Others have found themselves racking up debt.  With an interest-rate rise looking increasingly likely, people with debt, especially credit card debt, should be looking at their options carefully.

Can you get a better deal on your debt?

Credit cards are notorious for their high-interest rates.  If, however, you have managed to maintain your credit rating, you may be able to qualify for a balance-transfer deal.  This would give you breathing space from interest payments.  It might be enough to allow you to pay off the balance completely.  Even if it isn’t, it could still save you a lot of money.

Another potential option is using a personal loan.  You will probably still need a fairly decent credit record to get one of these.  There is, however, currently a lot more competition in this market so there is more likelihood of you being able to get a deal.  The key question, however, is whether or not the deal will be better than sticking with your credit card.

Comparing credit cards and personal loans

Start by looking at the financials.  Remember that lower monthly repayments will not necessarily translate into paying less overall.  In simple terms, if you know for sure that you’re only able to make the minimum payments on a credit card, then a personal loan may work out more affordable.

If, however, you think that there’s a decent chance you might be able to pay more than the minimum, then the credit card might actually be the better deal.  The reason for this is that credit cards make it easy to pay more than the minimum.  With personal loans, you can generally make overpayments but the process for this can be complex and may attract a penalty.

Another point to remember is that overpayments to a loan are usually permanent.  In other words, you can’t usually dip back into the money if you later find you need it.  With credit cards, you can (unless your card is suspended).  Obviously, this isn’t ideal but it can be a useful safety net.

What if you stick with a credit card?

If you stick with your credit card, then you need to make the minimum payment every month.  You want to overpay as much as you can.  If you just have one credit card then your approach is simple. You literally put as much of your spare cash as you can towards paying it off.  If, however, you have more than one credit card, then you need to decide your priorities.

There are basically two approaches you can take.  One is called the snowball method and the other is called the avalanche method.  With the snowball method, you focus on paying off the credit card (or other debt) with the lowest balance.  With the avalanche method, you focus on paying off the debt with the highest interest rate.

In either case, once this first debt is clear, you close the account (unless you have a specific, compelling reason to keep it open).  Then you move on to the next debt and so on.  You can choose your approach based on maths.  It is, however, often better to choose your approach based on what you feel will work for you personally.

If you feel like (relatively) quick wins will help to keep you motivated then snowballing is probably the way to go.  Snowballing can also help you to improve your credit record fairly quickly (as you’ll be closing accounts more quickly) and hence get better deals.  If, however, you’re able to cope with “slow and steady wins the race”, then avalanching may save you more money overall.

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