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Last Updated: Friday, 16 January, 2004, 08:29 GMT
Ask the expert: Dealing with card debt

My sister has a 5000 credit card debt. She has arranged to pay back 100 per month but the interest alone accounts for 98. What should she be trying to do to pay off her debt quicker? Heather UK

John Fairhurst, managing director, free debt advisory firm Payplan:

If your sister owes 5000 to one or more credit card providers she would normally pay back at least 3% of the balance each month, equivalent to 150.

Therefore, your sister must have negotiated with her creditors a lower contractual repayment.

Unfortunately, it seems that her creditors have simply reduced the amount she is paying off her debt rather than reducing the interest.

Do you have a question?

At this rate it will take a very long time for your sister to even start to eat away at her debt - not a good position to be in.

I suggest she goes back to her creditors and asks them to freeze or reduce the interest on her debt so that she can start to repay the money owed.

Creditors are not duty bound to freeze interest payments but if she makes a strong case they may listen.

There are ways that your sister can present her case to make them more sympathetic.

Back on track

The first thing for your sister to do is to sit down and put together a budget.

Debt action plan
Sort out a budget
Offer creditors repayments in line with money owed
Consider switching to a low rate deal
Beware consolidation loans

Working out how much she needs to live on will show her how much money is available for repaying her credit bills and other extras such as holidays, savings and birthdays.

It may then simply be a question of doing without a few extra luxuries until she is back on track.

If she offers a few pounds over the minimum payment, this would reduce the debt much more quickly.

Experience shows that it is important to include all bank loans, overdrafts and credit cards into any reduced payment scheme.

This is because creditors are more likely to consider freezing interest and charges when they can see that they have not been singled out for reduced payments when others are getting the full amount.

The fairest way of doing this is by making pro-rata payments so that creditors are paid in proportion to what they are owed.

Loan danger

Consolidation loans are often touted as the answer to debt problems.

We have all seen the adverts promising to consolidate debt into one easily affordable monthly payment.

However, the road to debt ruin is paved with consolidation loans.

Consolidation achieves its objective of reducing monthly repayments by extending the length of the loan - in the end the interest payable can be considerable.

What is more, consolidation loans are usually secured on property while credit cards are unsecured debt.

By using a consolidation loan to clear credit card debt the borrower is putting their home in harms way.

Another option for your sister is to shop around for a better credit card deal.

There are a host of credit cards which offer 0% interest on balance transfers - just remember if she does switch credit cards, this is not an open invitation to resume spending.

John Fairhurst, managing director, free debt advisory firm Payplan:

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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