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Updated: 4/1/2012

We all know that credit is harder to come by at the moment. This means that credit card companies are having to pay higher interest on the money they borrow to pay for your spending. To cover the increased costs, they are raising interest rates. Unfortunately, they can raise the rates whenever they like, as long as they give you proper notice (usually only a month).

But don’t panic! You can beat the interest rates by being a bit savvy. You don’t have to be a money genius – there are simple ways and anyone can do it. Read on to find out exactly what you can do to make sure you can afford the repayments on your credit card balance.

• Transfer your balance
• Finding a cheaper rate on existing cards
• Alternatives to credit cards
• How to negotiate with credit card companies

Transfer your balance

If your credit card balance is building up (or not shifting) the first thing to do is stop spending! It might seem obvious, but if you can’t pay the interest on the debt you’ve got already, you can’t pay the interest on a larger debt. Once you know your debt isn’t getting bigger you can then start shifting it. Lots of people are barely touching their balance; instead their payments are just paying off the interest.

The best way to combat this is to transfer your balance onto a 0% for balance transfers credit card. These cards will pay the balance on your old credit card for you. Then you don’t pay interest on this balance until the 0% period comes to an end. This means that you can really reduce the amount you owe.

Instead of paying £100 interest a month and only £50 of the balance for instance, you can pay the full £150 off the balance. Reduce your debt significantly and your interest payments at the end of the 0% period will be smaller.

Moneymagpie’s free weekly newsletter will keep you up to date with the best credit cards for balance transfers.

The Barclay Card Platinum Credit Card gives you a decent 0% on balance transfers for 20 months.

There are two things you need to know about these cards:

• There is always an admin charge to transfer the balance.

This is usually between 1-3% of the amount of the balance to be transferred. It’s not likely to be much compared to the interest you would pay if you don’t switch. However, you need to take it into consideration when moving your balance.

For example, the Barclays Platinum card has a 3.2% handling fee attached.

• You often need to have a good credit rating to get one.

This means that you ought to get a credit check before you apply. If you apply for a credit card and are refused your credit score will get worse. The reason for this is that if you apply for a card and are refused by one company, others may not be as happy to give you credit.

You really need to know where you stand credit-wise before you try the usual lenders. So unless you know your credit score is high enough, don’t apply for any cards. You can check your credit score for free by taking advantage of a free 30-day trial with the Credit Expert service from Experian.

If your credit score is low there is no need to panic. You can build up a good credit history by taking some simple steps. See our article on how to do it here.

The Golden Rule

If you apply and are accepted to a 0% balance transfer credit card you must not use it to spend. Most credit card companies will use something called negative payment hierarchy. This means that you have to pay off the oldest debt first – so the amount you originally transferred onto the card will be what you start paying off first.

Only when that is all gone can you pay off the new spending. The balance transferred is interest-free – but new spending will be charged at the normal rate of interest. So basically, if you use the card to spend, you’ll run up massive new debts which you won’t be able to pay off until you pay off the entirety of your original balance.

If you need more than 16-17 months to pay off your balance you can transfer again onto another card at the end of the 0% period. However, you will have to pay the admin fee again, and there’s no guarantee that you’ll be accepted for another good 0% deal.

• Get a free credit report here

Can’t get a 0% on balance transfers card? Get a rate-for-life card…

If you can’t get an interest-free card, consider a rate-for-life credit card. This is a card that will take on the debt you owe on another credit card and let you pay it off on a low rate, for as long as it takes you to pay it! Just remember that ‘rate for life’ doesn’t mean for your life, it’s for the life of the balance.

Credit cards typically charge interest at around 17% APR. However, rate-for-life cards can charge as little as 7% APR. This could really help manage your debt. And this may be a better option than a 0% balance transfer card if you think you’ll need more than 14 months to clear your debt. Like other cards, some providers will charge you a transfer fee, (between 2.5-3% on the whole) but some won’t charge you anything.

With a rate-for-life card you still need to remember the golden rule – don’t spend with it. It doesn’t matter if you have 12 months 0% APR on purchases. You cannot afford to rack up any more debts. The interest on any new spending is charged at a much higher rate. As with any other cards, you pay the oldest debt first, so new spending will gain interest at a higher rate for as long as it takes you to pay off your balance.

Rate for Life: Best Buys

The Barclaycard Platinum Simplicity has just one rate for everything. You’ll pay 7.9% on your balance transfers for the life of the balance and 7.9% on purchases. This is the only rate-for-life card that you should spend on if you really need to, as the interest is such a fair rate.

Alternatives to Credit Cards

You could of course consider a loan. This might be a sensible option for some people but doesn’t suit everyone. To help you decide whether you should get one, and which type would be best suited to you, there’s a whole heap of information about loans here.

Or, you can take a look at some slightly less conventional – but we think pretty clever - ways to borrow below.

Zopa

If you have a good credit rating, one of the cheapest places to get a loan is Zopa.

Zopa is a unique organisation that works with individuals instead of banks. It joins up people who want to make money by lending with people who want to borrow.

Zopa stands for Zone of Possible Agreement. This is the area between the minimum the lenders are willing to make on their money and the maximum the borrowers are willing to pay.

Basically by cutting out the middle men, Zopa tries to ensure that the lenders get a better rate than they would if they invested. But this also means that borrowers get a cheaper rate. Zopa only lends to people with very good credit ratings. If you do have a good credit score you can get a flexible loan for a low rate. Click here to see if you can apply.

Credit Unions

You can also get cheaper loans from a credit union. Credit unions are set up and run by a group of individuals who have something in common – for example, they live on the same estate or in the same town and they do the same job (hence a nurses’ credit union or cab drivers’ credit union, for example). They are somewhere between a bank and a co-operative and they offer a low-interest and easy-to-use saving and borrowing method for their members.

Members of the union invest any money they have in savings in return for a good and reliable savings rate. This money is then lent out to other members who need money for an affordable rate. So everyone benefits – lenders get a good rate of interest on their money and borrowers don’t have to pay through the roof. The union is completely controlled and run by members so any profits are ploughed back into the union.

The three main aims of a credit union are: to encourage its members to save regularly, to provide loans to members at very low rates of interest and to provide help to members in need of cash help and advice.

Credit unions used to only lend to people if they had at one time, saved money with the union. However, the unions are increasingly lending to those who have never saved with them. Credit unions do not rely on borrowing from other banks or the international money markets and don’t buy debts of other financial institutions. That means they’re well sheltered from a lot of the current economic problems.

In the current economic crisis, more people are turning to credit unions as a safer, low-risk place to stash their savings. To find your local credit union and get the details of their lending programmes, look at FindYourCreditUnion.

Before you apply for a loan, remember there are two very important things you should do first!

• Check your credit rating

There could be any number of reasons why your credit rating isn’t up to scratch. Lots are very easily remedied. Clean up your credit rating by clicking here and you will get a cheaper loan.

• Work out the absolute minimum amount you can borrow

The lower the amount you ask for, the less you will pay in interest on the whole debt. Asking for the absolute minimum also means the monthly payments will be lower. So the debt will be more manageable.

If you are borrowing to pay off a credit card, then try not to borrow any more than the credit card balance. Loan rates vary depending on the amount you want to borrow and the period of time over which you want to borrow it. We have a free comparison service – click here to get the best rate for you.

What to do next…

• Check your credit report for free
• Check out Zopa if you’ve got a good credit rating
• Find your local Credit Union

Negotiate!

Although credit card companies are suffering too, the payments they get from their customers are not just helping them scrape through. They are still making big profits.

What this means for you is that you can phone them and negotiate.

Make a budget

All credit card companies have special departments for hardship. They are authorised to do deals to help you manage your repayments. Before you contact them, the first thing you need to do is make a budget. This will demonstrate clearly to the company why you are unable to meet the repayments.

Make a list of your monthly incomings. Then make a list of your spending priorities – mortgage or rent payments, bills, food and living costs. Make totals for both incomes and your spending priorities and then subtract spending from income. The figure you are left with is your expendible income. If you are struggling to pay your credit card repayments then this figure will be quite low. This will demonstrate to the credit card company your inability to meet repayments.

Get some advice

Once you have made your budget you should then contact a debt advisory service. There are loads of free debt services. You should not have to pay in order to get debt advice!

Speak to a counsellor at the Consumer Credit Counselling Service or the Citizens Advice Bureau. They will be able to tell you what to expect when you phone the credit card company.

If you really are in over your head, they will also be able to help you with a debt management plan.

Getting advice will help you know what to expect and stay calm when talking to the credit card company. It will also demonstrate to them that you are serious and genuine about wanting to repay the debt.

The CCCS and CAB are respected organisations and will be taken seriously by your credit card company.

Contact the credit card company

Once you have made your budget you need to contact the credit card company. Tell them that you simply cannot meet the repayments and will have to declare bankruptcy if forced to make them. Make sure you have your budget to hand to give them exact figures to back up your claim. It will also be helpful to mention that you have sought advice from the CCCS, the CAB or another debt help charity.

When faced with this kind of situation the credit card company will have to respond to you. You are not whining or complaining. You are simply stating that either you can negotiate an affordable repayment plan or you will have to default on the entire debt. It is far better for the credit card companies to get their debts repaid slowly, than to have someone default on the entire debt. At least at a slower rate of repayment they get their money back. If you default they will get nothing.

This kind of negotiation may cause your credit score to go down a bit. However, it will be nothing compared to the huge black mark on your credit rating that defaulting on your debt would make.

Useful links

• Experian
• Loan comparison tool
• Credit card comparison tool
• Direct Gov
• Zopa loans