The best way to get out of debt

John Fitzsimons outlines the products that will help you clear your debt cheapest and quickest.

If you are stuck in debt, and want to do something about it, it can bef a little tricky working out which option is best for you. Should you transfer it all onto a 0% interest credit card perhaps? Or would you be better off going for a fee-free, lifetime balance transfer card? And when is a personal loan your best bet?

Today, I'm going to give you my guide to each of these three products, and what level of debt they are most appropriate for.

Let's start with a 0% interest card:

Going interest free!

There are an absolute load of terrific balance transfer cards out at the moment, offering you more than a year of 0% interest to pay off your debts.

The market-leader - and it has been for some time - is the Virgin credit card, which gives you 16 months, though other cracking cards to consider include the Santander credit card (15 months), the HSBC card, the Royal Bank of Scotland card and the Natwest card (all for 15 months, but for existing customers only) and a host of other cards offering 13 months.

These cards tend to be best for smaller debts - no more than a couple of thousand pounds - for a couple of reasons. Firstly, a smaller debt is much easier to pay off within the promotional period. For example, I have £1,400 on one of these cards that still has 14 months left to run at 0%. So it's only costing me £100 a month, which is pretty manageable.

However, the big reason why it's best to stick to smaller debts with these balance transfer cards is because of the transfer fee - in most cases around 3%.

Now that works out pretty reasonably with a smaller debt - in my case for example, it totalled about £45. But as I saved £194 in interest by switching to a 0% card, it was well worth paying this fee, for me. And I can easily afford to pay back that extra £45 that's been added to my debt before the 15 months are up.

However, if you are looking at paying off a much larger debt, say around £5,000, then a 3% transfer fee starts looking a lot larger - £150. Add that to your debt, and even with the Virgin credit card, you will have to fork out more than £320 each month to clear that debt before you start getting whacked with interest.

This table outlines just why a 0% card is best for smaller debts:

Debt of £2,000

The fee-free option

It sounds incredible, but loads of Brits are just content to pay interest on their outstanding debt when the 0% interest period ends - utterly daft!

One option is to switch to another 0% card at the end of the interest-free period. But this is a hassle, and you can never be sure you're going to be accepted for another card at that point in time. Plus, you'll have to pay another transfer fee.

If your debt is large enough that you are likely to need longer than 16 months to pay it off, then it can work out cheaper to go with a lifetime balance transfer card instead. This is because, with a lifetime balance, the rate of interest they charge is much smaller than the rate your 0% card will revert to. So, if you have a large debt that you need to be able to pay off over a long period of time, you will often find you pay less interest overall by going for a low-interest card over a card that starts out as 0% and then jumfps to a much higher APR after a short period of time.

Another brilliant positive is that most lifetime balance transfer cards don't charge a transfer fee either, so you won't get hit with an extra charge when you move over your debt. Which is always a bonus!

One thing to guard against though is spending on the card - while you will have a nice low rate of interest on your existing balance, any new spending will likely be hit with a much higher rate of interest.

And chances are you will have to clear the balance transfer debt before your monthly payments go towards that purchase, thanks to negative payment hierarchy, so whatever you do, don't make this mistake!

The best lifetime card in the market, in my opinion, is the Barclaycard Simplicity, which charges a typical APR of 6.8% for the life of the balance transfer. If you have a balance of about £5000 that needs clearing, I reckon it's the best option around.

For more information on the card, why not check out our video on the Barclaycard Simplicity?

The table below outlines why a lifetime balance transfer card might be best if you have a larger debt, but can't afford to make larger repayments each month.

Debt of £5,000

As you can see, in this case, the lifetime balance transfer card works out cheaper £512 than the 0% card if you spread your payments over time and only make small payments of £100 a month. But if you can afford to pay off your debt more quickly, in monthly installments of £200 a month, the 0% card then works out better, saving you £97.

Going for a personal loan

Personal loans, in my view, should always be a last resort. They should only be taken out for real necessities - and that doesn't mean a holiday, or a new plasma TV, no matter how nice such purchases might be.

They are only really there for when you need to borrow large sums of money - certainly in excess of £7,500, and typically around £10,000. These are sums that you are massively unlikely to be able to get hold of through an orthodox credit card.

You will also have a fair while to pay them off, typically around five years.

The best deal in the market currently is the Sainsbury's Finance personal loan, which charges a typical APR of 7.9% - lower than any other provider (note that it's only available to Nectar-card customers, so make sure you get a Nectar card before applying). So a £7,500 loan would set you back about £151 a month, and £9,044 in total.

However, it pays to remember that you are not guaranteed to get the advertised rate - providers are only obliged to offer their typical APR rate to two-thirds of applicants.

So if your credit rating isn't the best, chances are you will be getting a different offer, if you get one at all.

The figure you should instead focus on is the TAR - the total amount repayable. That's the only real way to compare loans in my view.

Another thing to look out for are any early repayment charges, as many people pay off their loans early. It's well worth making sure you know just how much you are going to be charged if you manage to clear your debt ahead of schedule.

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