Not all debt is bad. There are many good reasons to borrow money, these include things like taking out a mortgage to purchase a house, having a student loan and borrowing money for emergencies. In contrast, some bad reasons for borrowing money include borrowing money to get through the month. This kind of borrowing can lead to escalating debt and is often the reason people see their debt spiralling out of control.

Ultimately if you are borrowing money you will be charged a fee for doing this in the form of interest and this will vary between the different types of debt. The level of interest you pay will determine how expensive or cheap your debt is and, as such, the best way to borrow money is often determined by which form of debt is the cheapest ie which has the lowest interest rate.

In order to compare the cost of different debts and determine which is best for you, you need to consider the Annual Percentage Rate (APR).

What is APR?

The APR is the amount of interest you will pay on your debt each year. It is calculated to include the cost of any borrowing plus any fees involved with the debt. This gives you an overall ‘cost’ of debt and is therefore the best measure to use when comparing debts as there are no hidden charges. There is a legal requirement for the APR to be shown on any debts so that you can make a fair comparison.

If you’re trying to decide between paying off your debts and putting your money into savings then you will need to compare the APR on any debts to the Annual Equivalent Rate (AER) on savings. The AER is designed to allow easy comparisons between savings options but it is also the savings equivalent of the APR so can easily be used in this way.

So what is the APR? APR is the true cost of borrowing money. It takes into account:

  • The interest rate being charged by the lender
  • When the interest is charged (daily, weekly, monthly or yearly)
  • Initial fees
  • Any other costs

As the APR takes into account initial fees and any other costs, it is a true reflection of the cost of borrowing money.

The higher the APR, the more expensive it is to borrow.

How can I pay lower interest on my debts?

First of all, work out what APR applies to your debt. You should be able to find this on a credit card statement or your last statement of debt. If you can’t find this, phone up your lender and ask them.

Make a list of all of your debt and the APR that applies to them.

Then consider whether there are opportunities to transfer part or all the debt to another lender with a lower APR.

Use comparison websites to find out APRs for various types of debt. Find out what the APR is currently on your mortgage (phone your mortgage company).

Work out how much of your debt would benefit from transferring to the lower rate debt.

If you wish to transfer your debts, apply for the new debt and pay off the old debt.

Some key points

  • Once you have paid off or reduced your balance on your credit cards, don’t spend on them again. Be careful not to build up new debts on your credit cards with high interest rates.
  • Try to continue paying the same amount towards your debts as you are paying now, even if your debts are going down. This will mean that the outstanding balance comes down quicker.
  • If you can’t afford to pay the same towards your debts as you are paying now, reduce the amount you pay. But don’t reduce it to the minimum. The more you pay, the quicker the problem will go away.
  • Think carefully about transferring your debts to your mortgage. Your mortgage is secured on your house. If you cannot afford to pay your debts, the lender can and will repossess your house. If your debts are unsecured and you cannot afford to pay your debts, you will not lose your house.

I want to pay off some of my debts, which ones should I pay?

This is simple. Pay off the debts which are the most expensive first ie the ones that have the highest APR.

And if you are paying more than the minimum amount, pay the minimum amount on the cards with the lowest APR and pay the rest on the card with the highest APR.

Can I move my debts to a credit card with a 0% interest rate?

This may well be possible depending on the size of your debts and whether the credit card company is prepared to give you a credit card. Transferring to a 0% interest rate could save you a significant amount of interest payments but bear in mind there is likely to be an initial fee incurred when you transfer the balance, this is often around 3% of the amount being transferred.

Things to look out for with credit cards with 0% interest rates:

  • After the initial period where the interest rate is 0%, the APR will go up to a high level. Be ready to find another credit card deal and transfer your balance to the new card.
  • Have a plan ready in case you cannot find a new card with 0% interest rate.

If you can’t obtain a credit card with 0% interest rate or are worried about having to switch balances to other cards in the future, you may be able to use an existing credit card to reduce the interest you pay. Phone up the credit card company and tell them that you need cheaper debt and would prefer to remain with them.

How do I improve my chances of being lent money?

If you apply to lend money, the lender will check your credit score. A credit score is a measure used by lenders to help them determine if they think you are reliable and can afford to manage any new debt. They use this to decide whether or not they want to lend to you and, if so, at what rate.

Typically, the better your credit score, the more likely you will be to have credit applications granted and you’ll also be offered a better (lower) interest rate, meaning debt is cheaper for you.

Types of Debt

Debt comes in many shapes and sizes such as mortgages, student loans, credit card debt etc.

Recent years have seen a rise in 'payday loans', offering what many people think will be a quick fix to their debts which they can clear once payday comes around. However, payday loans can quickly become very expensive. Take a look at the information below so see how payday loans work and how quickly the costs can escalate.

Debt smart


We are not Independent Financial Advisers (IFAs) and nothing on this website should be construed as independent financial advice. If you feel you would benefit from speaking to an IFA about your personal circumstances, you can find more information here.