An easy way to clear your debts

Taking out a new credit card could actually help you pay your existing debts more quickly and cheaply. Here's how it works.

The red is never a good place to be. And in the current economic climate, it's become even more important to get back into the black quickly. Unemployment is now a constant threat for many of us - and if the worst happens, we want to be facing it with as few outstanding debts as possible.

Applying for credit might seem a crazy and irresponsible thing to at the moment. However, if you currently owe £5,000 or less, transferring your debt onto a new credit card could actually allow you to slash your interest payments and clear your balance more quickly.

Of course, not all credit cards are created equal. You need to pick the one that's right for you, and you need to handle it correctly. Here's how a credit card could make your debt problem better, not worse.

If you can clear your debt in 16 months or less

First, you need to work out how long it's going to take you to clear your debts. Be conservative in your assumptions, and try to budget for the odd unexpected and unplanned expense - this sort of thing is bound to crop up.

If you're confident you can realistically clear your debts in 16 months or less, consider applying for a credit card which offers 0% on balance transfers. You will have to pay a transfer fee (typically around 3% of the amount transferred) but you won't have to pay any more interest on your debt for as long as the 0% promotional period lasts.

The current market leader is the Virgin Money card, which offers 0% on balance transfers for 16 months.

I have used this card myself, to clear over £2,000 of debt that I was paying interest on elsewhere. It did the job very well for me, but you need to follow the rules (to the letter) at all times. If you let things slip in any way, Virgin will come down on you extremely hard. Read Is this really the best credit card on the market? to find out more.

Another advantage of the Virgin card is that (unlike most other credit cards) it also allows you to transfer non-credit card debt onto it, as part of the 0% deal. This process, known as money transfer, lets you pay off interest-charging debts (like overdrafts or loans) and convert them to interest-free debts on the card.

If you need more time

Remember that a 0% card really is only a short-term debt repayment solution. When your 0% deal comes to an end, you're going to be charged a hefty rate of interest on any remaining balance. And I mean hefty; the Virgin Money card's typical APR is 16.6% - and some readers have told us they've been charged as much as 35% APR by MBNA (the card's operator).

So - if you're not sure you can clear your debt in 16 months, you need to look elsewhere. And here are where lifetime balance transfer credit cards come in.

In a nutshell, a lifetime BT card will give you a low rate of interest for as long as it takes you to clear your balance. The market leader is currently The Barclaycard Simplicity credit card, which offers a rate of 6.8% APR on balance transfers.

So, if you're currently paying more than 6.8% interest on your existing debt, it may well make financial sense to apply for this card. Just bear in mind the following things:

• A 2.5% transfer fee applies. If the current rate of interest on your debt is only marginally more than 6.8%, you'll need to work out whether you'll still save money switching after you've taken the transfer fee into account.

• The typical rate of 6.8% rate is variable, not fixed - so theoretically it could rise (or fall) at any time

There are also certain 'long term' BT cards that offer low-interest transfers that last longer than 16 months, but not indefinitely. To find out more about this 'middle ground' category, read Demolish your credit card debt.

When a credit card won't work

Your credit rating isn't good enough:

Many people in debt actually have very good credit ratings (I fall into this category myself). This is because, through a cycle of borrowing money and making regular repayments, they've built up an established and reliable credit history.

However, there are plenty more who won't be accepted for the credit cards I've talked about. All the 0% and lifetime balance transfer cards I've ever come across require you to have a 'very good' or 'excellent' credit rating to be accepted.

If you're not sure what your credit score is like, you can check it for free using this report from Experian. Just make sure you cancel your membership before the end of the 30 day free trial period, so that you won't be charged for this service in the future.

If your credit rating isn't very good, I'd advise against applying for the cards mentioned. Every failed application is another black mark on your credit score - and could damage it even further. 

You owe more than £5,000:

If your total debt is much more than £5,000, transferring it to a low or no-interest credit card probably isn't an option.

The longest 0% deal only lasts 16 months. Can you realistically hope to clear over £5,000 of deal in that time?

And even if you're considering the lifetime alternative, remember that most people (even those with immaculate credit ratings) are not offered initial credit card limits of more than £5,000 anyway.

Plan B

If you find that transferring your debts to a credit card isn't a good option for you, focus instead on clearing them as quickly and as cheaply as possible.

The best way to do this is to use the 'snowballing' technique; read Free yourself from credit card debt to find out more.

Good luck!

More: 125 tips for dealing with debt | What REALLY damages your credit rating

Compare credit cards with lovemoney.com or get a free credit report from Experian