Personal finance expert issued a crucial credit card interest alert, explaining that paying even 1p less than the full balance is a big mistake
Personal finance expert Martin Lewis has issued vital guidance to credit card holders with providers such as Lloyds Banking Group, Barclaycard, Santander, Tesco Bank, American Express, NatWest, and HSBC.
Mr Lewis warned that a single error could result in hefty interest charges - and even 1p could prove costly - and said that people need to pay their debt off in full at the end of May. The money-saving specialist tackled the subject on his BBC Podcast, answering a listener's question about the best way to handle savings - and explained not leaving any credit on the card every month was crucial.
Using a £1,000 scenario to illustrate his point, he said: "This is an important warning about the way that credit cards work. Imagine you've spent £1,000 on the credit card.
"If you then pay off the £1,000, so you totally clear it, there is no interest in the month. But if you were to pay off £999.99, so you're just a penny short. You don't pay interest on a penny for the month. You still pay interest on the entire £1,000.
This is why for years my catchphrase has been pay off your credit card in full. The in full is important. I talk about it when it's a credit card reward, say for getting cash back or for cheap spending on a credit card abroad. Because if you do it in full, you neuter the credit card's ability to charge you interest.
If you miss even a penny, it can still charge you a whack.
" Caller Dan enquired: "You've talked about whether you should pay off any debt before savings and investing. Does this apply to mortgages.
" Mr Lewis clarified that the key issue was establishing whether an individual would be better off putting their money to work elsewhere. Video Loading Video Unavailable Click to play Tap to play The video will auto-play soon8Cancel Play now He said: "My general advice about debt is you should always pay off expensive debt before saving. It does get a little bit more contentious because you also want to have an emergency fund.
" "It depends on the nature of the debt that you pay off. The emergency fund is there so you don't have to pay off even more. Credit cards are quite simple because they are an open-ended system of borrowing.
"So if you think about it, if you've got £1,000 on a credit card and you've got £1,000 in savings, the credit card is costing you 20 per cent, the savings are gaining you 4 per cent. You gain 16 per cent if you use the savings to pay off the credit card.
"And the advantage with the credit card is once you pay the credit card off it can sit there at a zero balance and if you have an emergency because you now don't have any savings you can just borrow back on the credit card and you'd be in no worse a position but you would have saved the interest meanwhile. " This means that an individual with £3,000 on a credit card would face charges of £600, while having £3,000 in savings would generate just £120.
Addressing mortgages, he said: "The general rule of thumb is this - if the mortgage rate is higher than the after-tax rate you can earn on savings - so let's say you've got a 6 per cent mortgage and then 4 per cent in savings - then you are generally better to overpay the mortgage, making sure the payments go towards reducing your capital which will effectively reduce the amount of time you have left to pay on the mortgage.
"If the savings rate is higher than the mortgage rate, then you are probably better off to save - with a couple of caveats. First of all I'd go on to a mortgage overpayment calculator because if it's very close between the two generally overpaying your mortgage will win because of the vagaries of the way interest is worked out.
"But also if you reduce the amount of your mortgage debt, if you've got quite a high proportion of borrowing to your house's value if you reduce the amount of your mortgage's debt, you reduce the loan to value which could mean you get a cheaper mortgage when you come to remortgaging. "The two big caveats to overpaying your mortgage are - first of all I'd always have an emergency fund in liquid cash because if you overpay your mortgage and suddenly something happens that you can't pay it any more, that's not going to start the bank going 'oh you've overpaid so don't worry about paying us now'.
They're still going to put you in arrears.
"And second you need to check that there aren't any overpayment penalties. " He noted that, as a general rule, lenders typically allow borrowers to overpay by as much as 10 per cent without incurring any additional charges.
United States Latest News, United States Headlines
Similar News:You can also read news stories similar to this one that we have collected from other news sources.
Martin Lewis reflects on ‘broken’ childhood in emotional speech as he accepts BAFTA Special AwardMartin Lewis delivered an emotional speech in which he reflected on his childhood as a 'broken, scared boy' as he was presented with the BAFTA special award by Richard Osman
Read more »
What Did Martin Lewis Say About His Childhood At The BAFTAS?Martin Lewis said he was a 'broken, scared boy'. Read more on Grazia.
Read more »
Martin Lewis OVO, Octopus, EDF May '6 week rule' to get £300 backThe finance guru says May is the 'perfect time' for energy customers paying by direct debit to make check and claim back money
Read more »
Martin Lewis tells Octopus OVO EDF customers of May '6 week' rulePersonal fianance expert took to Youtube to explain how people could get £300 back
Read more »