The personal finance expert said major bank customers could be making a big mistake
Martin Lewis has issued an alert to anyone with a debit card with major banks including HSBC, Barclays, Lloyds, NatWest, Santander UK and Nationwide – and said they are ‘more dangerous’. The personal finance expert explained that people often use debit ahead of credit cards because of the interest rates.
However on Facebook Mr Lewis, who regularly appears on ITV and the BBC, said this could be a mistake – and people can be hit in the pocket badly. He said: “Is your debit card really a secret debt card? Many people say credit cards bad, debit cards good, but actually typical high street interest rate of a credit card is 25%.
“Typical high street interest rate of an overdraft 40%. So of the two, it’s your debit card spending if you’re overdrawn that is more dangerous than a credit card, though neither of course are good. Now we have to take that honest step with the logic. Many people who have both debts will actually use money in their bank account to try and pay off the credit card. But think about that.“
He said that the problem arises because people don’t realise the difference in interest rates – and end up paying more: “What that actually means is you’re increasing the amount of more expensive debt in the overdraft to reduce the cheaper debt. You would be far better off just to make the minimum monthly repayments on the credit card and focus on clearing the overdraft.
“In fact, if you have more than one debt, the sensible move is always to list them in order of interest rate and then you take the highest interest rate. debt, which will probably be your overdraft, and you focus all your spare cash on trying to clear that while just paying the minimums on everything else.
“Once you’ve cleared that, you focus on the second most high expensive debt, and you try and clear that and so on and so on. It’s called snowballing. And hopefully, it’ll get you debt-free a bit more quickly.”
However he has previously said there is a key rule to remember for people with credit cards – make sure you pay it off in full every month. The money-saving expert tackled the subject on his latest BBC podcast, answering a listener’s question about the best strategy for handling savings. 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.”
He continued: “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.”
