These are the bills you shouldn’t be paying | The independent


The sudden, abrupt but fully anticipated recession means we are told over and over again to build up our emergency cash flow and whatever we do to pay off those debts as quickly as possible to shore up our finances for the turbulent times ahead. .

For the most part, this is absolutely the right advice. But not always.

People facing serious debt problems should seek expert and individual advice from a charity such as Stage change, who can develop a personalized plan to pay off debts or write them off.

But if that’s not you and you were able to start sorting your money with unexpected Covid money, or if the crisis has led you to boring but largely manageable levels of debt, here are some strategies you could use.

Pay: credit cards and overdrafts

We’ve always known that credit cards are an expensive way to borrow money, but now with the new overdraft fee rules backfiring on them to produce a typical 40 percent interest rate. , the overdrafts in particular are extremely expensive, although we do not always realize it.

You’re absolutely right to pay them off as quickly as possible, and of course that goes for any bank card, home loan, or payday loan – the more expensive forms of mainstream borrowing.

Although the “snowball” method of paying off the smallest debt first is increasingly popular for its psychological boost, experts urge debtors to focus on paying off the smallest debt first. more expensive. It’s probably your overdraft. Clear it, and then consider canceling the installation if you can. It’s not worth it.

Meanwhile, with the number of 0% balance transfer agreements on credit cards dwindling, the days of bouncing back and forth between free at will loan agreements without ever paying back anything are quickly fading away.

Start by getting the balances on all of your cards to less than half of the total available credit to reduce the effect on your credit score. Then pay them off quickly and harshly in full.

Can pay off: mortgages & personal loans

Longer-term loans with lower interest rates sometimes don’t even look like debt, they just sit in our brains under a folder titled “bills” as if it were a necessary constant in life. life from which we cannot escape.

But paying off a mortgage or loan too much, even by a few pounds each month, could dramatically reduce its term and, therefore, the amount of interest you end up paying overall. But there are caveats.

First, these products often carry an early redemption fee (ERC). Mortgages in particular will often charge you if you pay off more than 10 percent of the outstanding balance in your fixed period or the first two years.

Auto loans often come with similar penalties depending on the type of financing you have put in place to fund it. You might need a lump sum to pay off your car finance and you might be limited when a prepayment is possible.

Second, once you pay the money back, it’s gone. So if you then find yourself in, say, the middle of an economically corrosive pandemic and need some extra cash to help you out, these aren’t products that will flexibly spit out money, even if you do. are a model borrower. And by now, you may have used your payment holiday options as well.

Have an emergency fund in place of three to six months of your usual living expenses before you start overpaying.

There’s also the question of whether paying too much for long-term, low-interest debt is the best use of your money. Today’s terrible cash savings rates, even on fixed rate offers that lock your money in for several years, may not earn you more interest than you would save on the loan.

But investing the money instead could beat our current ultra-low interest rates, especially with such a long investment horizon. It’s definitely something to get the advice of an independent financial advisor, as the stock markets are volatile places, especially at this time, and some investment vehicles come with ridiculous management fees.

Don’t Pay: Student Loans

Around 130,000 England-based graduates made additional voluntary repayments in 2019/20 worth £ 2,740 each. Another 10,600 people repaid an average of £ 4,310 before any money was due.

But maybe it was a pointless exercise.

A student starting college this year and taking full tuition and maintenance loans could end up owing more than £ 61,500 upon leaving, Hargreaves Lansdown calculated. To pay it back in full, they would need a graduate salary of £ 53,100 – assuming they don’t take any career breaks and get pay increases.

Back in the real world, the average annual repayment now stands at less than £ 1,000 per year, up from just £ 120 over the past decade.

Unsurprisingly, the Institute for Fiscal Studies (IFS) has found that only 17% of graduates will end up paying off their loan in full.

“It’s worrying sending your kids to college to rack up tens of thousands of pounds in debt – and no one likes the idea that most will pay them off until their 50s,” says Sarah Coles, analyst. personal finance at Hargreaves Lansdown.

“But by focusing on official student loans, we can end up wasting money – and overlook the real issue of student debt that accumulates along the way.

“Most graduates won’t come close to paying off their student loans until they’re written off. However, many are so worried about carrying the debt that they make additional repayments.

“For some people this will be a sane approach based on careful calculations, but for many there is a real risk that these additional payments will be a waste of money,” she warns.

“In the meantime, during their studies, they will have taken out thousands of pounds of loan which could come back to bite them.”

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