This piece first appeared in Reader's Digest in January 2001
The text here may not be identical to the published text
If you are still worrying about the cost of Christmas then why not start the New Year with a resolution to help pay for it by giving less to your bank or building society? Not many people realise that the bank is on their Christmas list. But the chances are that over the course of a year you give away to them more than you spend on your family’s presents. This month’s New Year fresh start will show you how to take your bank manager off your Christmas list for good!
Most of us have a credit card and more than half of those that do use it as a way of borrowing – in other words we do not pay it off in full each month. The average debt on a credit card is £1700. Most of the major banks will charge you around 19% a year on your credit card debt. So for each £1000 of debt you are paying £190 in interest over the year. It used to be called usury. But you can cut that payment to the bone. There are lots of new credit card companies keen to steal you from their rivals with an offer you cannot refuse.
First, they will offer a really low interest rate for the first six months on all your new purchases – less than 3% is easy to find and, as I write, Capital One Bank is offering zero per cent for six months. Second, most of them will let you transfer the balance from your old credit card at a favourable rate of interest. Most offer this rate for six months but some continue it until the balance is cleared. The lowest I have found in that category is 5.9% from NatWest Bank on a Visa or Mastercard. If you take out a new credit card and move £1000 of debt to it, you can clear it in a year by paying around £86 a month. Over the year you will have paid just £32 interest. But the NatWest card is hopeless for new spending – it charges an exorbitant 18.9%. So just keep it to manage your debt and take out another card to put in your wallet. If you are the sort of person who knows they will run up some debt on their card, then go for one with a low initial rate – look for less than 3% for six months – and then a low standard rate – look for less than 15%. The cheapest on offer at the moment is Abbey National’s cahoot service, typically 8% but that does depend on your credit rating.
If you have money in a savings or deposit account then it will almost certainly pay you to check the rate of interest you are being paid. Over the last couple of years, banks have been slashing the rate they pay on some of their long-established savings accounts. There is no good reason for doing this except to make money out of their customers. For example, the Woolwich Prime Gold Account used to pay a competitive rate of more than 5% a year. Now it pays just 0.5%. Abbey National and many other high street names – most of them banks that used to be building societies – have slashed savings rates on old accounts to around 1% a year or less. It really is a disgrace. Especially when you consider that the best rates on offer are very good indeed.
Top at the moment is Nationwide paying 7% on its e-Savings account. It is operated entirely through the internet and you only need £1 to open one, though you do have to open a Nationwide FlexAccount to transfer money in and out of it. If you do not want to run your account over the internet and you have at least £1000, then you can get 6.59% from First Active’s Rate Tracker telephone and postal account. There are about a dozen companies altogether that offer 6% or more on your money. The chances are that if your money has been sitting in the same account for a year or two, you can earn more by moving it.
There is another way to boost how much your money earns. Interest rates are always quoted gross before tax. So if you pay tax you must deduct a fifth to see what you wil actually get – or two fifths if you pay higher rate tax (so 6% becomes 4.8% net of basic rate tax, or 3.6% net of higher rate tax). But you can avoid this tax charge on the interest on some of your savings by putting them into an Individual Savings Account. Money in an ISA earns interest tax-free and in this tax year you can put up to £3000 cash into one. There are no restrictions on withdrawals – you just can’t put any more in once you have deposited £3000. But remember that you cannot have a cash ISA if you already have more than £3000 invested in shares in an ISA.
If you have savings and some debts remember that you can save money by using your savings to pay off the debt. Even if you’ve taken the advice in this piece so far, your credit card debt could be costing you 14% while your savings will be earning 7% before tax – in reality the figures could be 20% and 1%. So you will save money if use some savings to pay off some debt.
Money in the bank
So you have cut the cost of your debt and boosted the value of your savings. Now, what about your current account? Does it pay you interest? Does it give you free banking? If you answer ‘no’ or ‘don’t know’ to either of those questions you can almost certainly save more money.
Most current accounts pay no interest or something derisory like 0.1% on your credit balance and then they blast you with bank charges when you write a cheque or pay in money, or set up a direct debit. But many of the new banks that have sprung up recently are tempting us with reasonable interest rates and no charges. For example, Smile from the Co-operative Bank will pay you 4.75% on a normal current account, with a cheque book and no bank charges as long as the account is in credit. So when your pay goes in at the end of the month it will be earning money for you. It may not seem much – a balance of £2000 will earn just 21p a day after tax – but it is better than nothing. And if your average balance over the year is £500, you will be around £20 better off by next Christmas – it’s money in the bank. And cahoot from Abbey National will give you even more – 5% if you have a cheque book and a massive 6.5% if you are willing to operate your account without one.
If you want to change banks, some of the newer ones will do all the paperwork for you – transferring your direct debits and standing orders. And a new Code of Practice means that the bank you are leaving must co-operate with you to make the process go smoothly. By the end of the year there should be a new computerised system to do it all automatically.
I wrote in this column last April about how much money you could save by changing from a standard rate mortgage to one of the many good offers of discounts or fixed rates that are around. Savings of £1000 a year on a typical mortgage are still easy to obtain. Rather than going into it all again, why not check out the original article on our new and improved website at http://www.readersdigest.co.uk
Capital One Bank 0800 952 5252
NatWest Bank 0800 200 400
Nationwide 0500 302010
Abbey National cahoot www.cahoot.co.uk
First Active 0800 558844
Co-operative bank www.smile.co.uk