Credit-crunched Brits managed to pay off over £23 billion more in debt (excluding mortgages) than they took out in new borrowing during the third quarter of 2008, new research has found.
However, savings fell by 50% from £38.5 billion to £19.3 billion during the same period, according to financial adviser Unbiased, indicating that the nation is prioritising clawing its way out of the debt over setting money aside.
This means that, for every pound saved in the last quarter, people also paid off £1.24 of their debt.
This represents a seismic shift in Brits’ financial habits, as it represents the first time that debt has fallen in the eight years Unbiased has been conducting its study.
| Date | Borrowing £m | Savings £m |
| 2001 Q3 | 13,393 | 22,115 |
| 2002 Q3 | 21,434 | 20,993 |
| 2003 Q3 | 24,828 | 19,432 |
2004 Q3 | 19,662 | 24,266 |
| 2005 Q3 | 17,303 | 24,788 |
| 2006 Q3 | 15,860 | 34,104 |
| 2007 Q3 | 10,154 | 32,905 |
| 2008 Q3 | -23,872 | 19,252 |
Case for clearing debt is stronger now
Obviously it’s never a good thing when saving levels fall, however the fact its being used to clear debt makes it a savvy move, especially given the current climate where savings rates are plummeting while the cost of borrowing continues to rise.
During the summer, there were a number of fixed rate savings accounts paying over 7% interest, but most now offer between 4% and 5.5% (the rates on instant access accounts are currently higher, but these will almost certainly start to fall soon).
Conversely, the average APR on credit cards in June was 17.6%, but has since risen to 17.9%. Personal loans have followed a similar path, with the average rate offered edging its way ever nearer to 10% (and rates will likely continue to rise in the New Year following the crackdown on payment protection insurance).
Make sure you have the best approach
Given the high cost of borrowing, it’s essential you find the most cost effective strategy for paying it off.
The best place to start is ensuring you fine tune your finances in order to free up as much money as possible to tackle your debt mountain. Do this by drawing up a detailed budget (read more here), then using this to identify where you can cut costs, remembering to focus on both your essential monthly outlays and luxury purchases.
This done, you need to ensure your existing debt racks up as little interest as possible. Given the sky high APRs on credit cards, this is the most important debt to tackle (along with store cards, of course).
Make use of one of the number of 0% balance transfer credit cards on the market, the best of which is currently the Virgin credit card, offering 16 months interest free, with a 2.98% fee charged up front.
Watch out for sneaky card trick
Of course, with Christmas fast approaching, you may have a number of purchases coming up that you plan to put on your new credit card.
You should, however, avoid this at all costs, as almost all banks (excluding Nationwide) have an inverse order of payments that basically means you’ll have to clear your entire transferred debt before you can start paying off your Christmas purchases.
A good idea is to keep two separate cards, one for purchases and one for balance transfers.
