Do you have a Jekyll and Hyde-type instinct?

More than 12 million of us are Jekyll and Hydes when it comes to savings and debt according to new research from Axa, an insurer.

The Mr Hyde in us is lured by the attraction of easily available credit, which funds a buy now, pay later lifestyle. And then rather than using our spare cash to pay down our debt each month, the Dr Jekyll instinct has us squirreling it into a savings account.

The main problem with this strategy is that the interest rates charged on credit cards and loans tend to be far higher than those paid on savings accounts. Axa found that on average, for every £1 of interest earned on their savings, these "saver debtors" are paying £5 in interest on their debts. They would therefore better off clearing their debts before they started saving.

As someone who was a saver debtor until last year when I finally repaid all my borrowings, I think it is easy to understand why so many people are doing this - it's the comfort factor, the 'just in case money'. While it is important to clear your debts as quickly as possible a lot of people like to have some money in savings, just in case there's an emergency. And I think this is particulary the case if you are homeowner.

When I bought my first flat four years ago I still had debts from my days at university and the amount I owed initially increased as I bought furniture for the flat. I paid money off my borrowings each month, but I also put some money away in a savings account and I'm very glad I did because of all the unexpected expenses that arose like a collapsed drain and problems with the roof. The workmen that fixed these problems didn't accept credit cards so cheque or cash was the only method of payment. I was therefore lucky I had some money in savings otherwise my only other option would have been to take out another personal loan, which I didn't want to do, or use a credit card cheque which was even lower down the list of possible payment options (most credit card providers charge you a higher rate of interest is you use a credit card cheque so they really are something to be avoided).

I did have a personal loan which I'd taken out to pay for new windows in my flat - the rate was 6.2% so it was higher than savings rates at the time. But the money I juggled on credit cards was either held on interest free cards or on my Intelligent Finance (IF) card and this is where I managed to outwit Dr Jekyll. While I was saving each month, the money was going into an IF savings account and I offset it against the balance on my IF credit card. So, that money was working as if I'd paid it into my credit card account: rather than earning interest on my savings, I was paying less interest on my credit card balance. I also paid more than the minimum of my credit cards each month and managed to repay my personal loan early.

If you feel that you need the security of having some money saved in case of an emergency I think it is possible to save and have debts at the same time.  But your main aim should always be to clear your debts as quickly as you can.

Offsetting is a great way of reducing the amount of interest you pay. Another option is to take out an interest free credit card. You can either pay so much off each month that the debt will be cleared by the end of the 0% term or aim to clear it once the introductory period is over - perhaps from the money you have saved during that time. Transferring the balance onto another 0% card is an option but there are only a limited number of interest free deals available so you cannot do this indefinitely - that debt will have to be repaid at some point.

All of this requires quite a lot of self-discipline however. If you can't be bothered, or don't think you are organised enough, to keep an eye on rates and keep moving your money around then the basic rule of clearing your debts before you start saving is the best, and most straightforward strategy to follow.

Comments

[Credit Card Debt Help]

It may be more beneficial to just leave credit cards out of the picture. They ruin millions of americans lives every year and it keeps getting worse.