Should Bank Savings be Used to Clear Debt?
Reduce Interest Payments, Household Bills and Get Out of Debt
Mar 22, 2009
A report in March 2009 by Credit Action showed that the average UK personal debt, including home mortgages, currently stands at £59,730. Interest payments on personal debt over the last 12 months alone amounted to £76.2 billion. At the same time, bank savings are earning record lows meaning that it may well be sensible to use personal savings to clear debt and balance household bills.
Should Bank Savings be Used to Eliminate Credit Card Debt?
Credit card debt attracts an average of 17.42% APR when only the minimum monthly repayment is made. Even more worryingly, uSwitch.com points out that cash advance customers are regularly charged upwards of 29.97% APR. This doesn't even take into account how much additional fees and late payment charges add to household bills.
Whilst credit card debt attracts a high APR, bank savings rarely yield interest payments of more than a few per cent. Customers that leave their money in instant access account make just 0.1%. Whether bank savings are used or not, personal debt is eroding the value of savings. Personal savings, up-and-above a level that provides basic security, should always be used to clear debt on credit cards.
Using Bank Savings to Clear the Home Mortgage
The majority of consumers don't have sufficient bank savings to pay off a home mortgage in full and are probably better off keeping these as a buffer. Should sufficient personal savings be available to fully clear debt on a home mortgage, pay it off. However, beware of early redemption penalties.
Interest-Free Credit on Hire Purchase Agreements and Bank Overdrafts
Whilst all consumers want to get out of debt, using bank savings to clear interest-free credit should normally be avoided. The one exception to this rule is where someone knows that he will spend his personal savings if he fails to clear debt on hire purchase agreements and bank overdrafts.
Abbey National currently offers new customers an interest-free bank overdraft of up to £2,000. As opposed to paying off personal debt, it makes more sense to withdraw it, pay the money into a cash ISA and earn interest payments.
Always pay secured personal debts first, closely followed by high APR unsecured debts on credit cards and loans. Don't use bank savings to clear lines of interest-free credit as these provide a consumer with the chance to earn money from interest payments.
Those struggling with financial difficulties and personal debt may be interested in finding out whether they have an illegal credit card or unenforceable loan agreement. Individuals that are struggling with serious debt problems may be able to write-off debt with an Individual Voluntary Arrangement.
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