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Are debts always bad? - [BACK] Quoting figures about debt is a favourite past time of many financial journalists. Possibly the most frequently used figure is that the total UK debt stands at a huge £1.38 trillion as of September 2007. They often fail to mention that the UK also has a considerable amount of savings (£867 billion) while the total UK wealth including property stands at some £6 trillion. It’s not all that bad then; and we’re not just a nation of irresponsible spenders as is often implied. What is striking is that the debt and savings figures aren’t that far apart. True, debt outweighs savings by some 50%, but why have any savings at all when there is debt? After all, banks profit from having lower interest rates on savings than they do on credit; so doesn’t the cost of debt always outweigh savings? The short answer is no. Here are a few reasons why: To put it simply, those with both debts and savings are likely to be overspending. The value of having a credit card when you also have a healthy savings account is often very questionable, especially when you think that the card rate is likely to be between 10-20% at current rates and a savings account will be between 4-6%. However, you may find yourself in a mortgage that you can’t overpay, or a loan that will have an early payment fee. With this in mind, it’s often a good idea to continue paying off the debt until the penalty is small enough to make it worthwhile paying off in one go. It’s also possible to have very cheap debts. While short term lending on credit and store cards is expensive, longer term debts, such as on personal loans, are much cheaper. It’s even possible to get a personal loan with a lower interest rate than a savings account. On some regular savings accounts, such as Alliance and Leicester’s Premier Regular Saver, it’s possible to get a rate of 8% (although there are maximum deposits of £250 per month), while ASDA Finance offer a personal loan rate of 6.9%. However, you won’t really get anything out of taking out such an account and loan in this manner. A rate of 12% sounds great, but you can only gain that amount of interest on a £3,000 sum per annum, while personal loans are usually a minimum of £5,000. While interest payments of over 6% aren’t usually bettered on credit, it is possible to obtain it entirely interest free or with very low interest in some circumstances. For instance, a student loan has a current rate of 4.8%, which is currently quite high and likely to go down, while most savings accounts are above that figure. There’s no real need to pay off your student debt early if you intend to get another loan, because the interest rate is always likely to be higher on the latter. Meanwhile, there are also 0% credit cards to take advantage of. Many credit cards have incentive offers when you first obtain them, such as 0% on purchases for the first three months. It’s possible to keep this up if you hop around lenders and get new cards with opening incentives and 0% on balance transfers, so you could end up paying 0% for a long time if you’re particularly careful. However, be warned that this will take a very large amount of attention to pull off, and you could get stung if you miss a particular payment. There are clearly some instances when it’s a clever idea to have both savings and debts – just make sure you take those debt options where the interest is lower than your savings, otherwise drop the savings and pay off those debts. [BACK] |