Martin Lewis issues warning for credit card users
With inflation running high, and the price of food, energy and other essentials still at record levels, Martin Lewis has issued a warning to those with credit cards and loans.
During the cost of living crisis, turning to loans and running up credit card debt has been one way for people to keep financially afloat.
Rising interest rates have also hit mortgage-holders hard, with some people’s mortgage repayments zooming up by hundreds of pounds a month.
But Martin has a warning for anyone who has a credit card and savings, and urges them to act.
Here’s what you need to know.
How to save money on credit card bills
For most of those with savings, Martin has one crucial piece of advice – pay off your credit card debts.
The reasoning is surprisingly simple:
£1,000 debt on a credit card at 22% costs £220 in interest over a year.
£1,000 saved in a savings account at 3% earns £30 in interest over a year.
So pay off the debt with the savings and you’re £190 a year better off.
As interest rates have risen, the temptation to put money away for a rainy day in a savings account with a decent amount of interest has risen – but as this example shows, if you’ve got debts you’re best off dealing with those first.
The same advice on paying off debts applies to loans and, in many cases, to mortgages, though the latter are often at a cheaper rate and more flexible, so that needs thinking through.
Who shouldn’t pay off their debts?
Martin has two exceptions to the rule, and these are:
If the loan is interest-free or on very low rates, so the interest rate on your debt is less than the amount your savings earn after tax (such as an interest-free credit card).
If you’re locked into a deal (such as a loan) so would pay a penalty for exiting early (wait until the penalty is small enough).
Do I need a savings float?
In an ideal world, we’d all have three to six months’ worth of savings for emergencies – but there’s no need to panic if you don’t.
The idea of paying off your debts with savings is that in a genuine emergency (like losing your job, not wanting that £1,000 mini-break) you could use the credit card or take out a loan.
Martin says: ‘The idea of having some cash in a savings pot feels safe, especially as traditional budgeting logic berates us to always have an “emergency cash fund”.
‘While it’s the right aim, for anyone with expensive credit card debt, where you can borrow more without applying for a new product, there’s a better way -pay off your debt with your savings, but without then cutting up your credit cards as it’s important to keep the credit available in case of a substantial emergency.
‘And substantial means just that, your roof falls in or you can’t feed the kids, not a new TV.’
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