Consolidation should be first priority, says expert

Those who have some money to spare should make sure they are putting most of it into paying off debt rather than building up savings, a financial expert has advised.

Head of consumer finance at lovemoney.com Ed Bowsher remarked: “While interest rates are low, more of your repayments will go towards paying off your actual debt rather than on interest charges.”

This is because while debt can be cut through repayments reducing it quickly at a time when low interest costs mean it is only rising slowly, paying money into a savings account will offer a low return due to the current 0.5 per cent base rate.

Mr Bowsher added: “Then, when interest rates inevitably rise, your outstanding debt will be smaller and the interest rate rise won’t be as painful as it might otherwise have been.”

However, the expert stated this advice comes with the caveat that it is useful to have some savings to deal with any sudden emergency, such as illness or the loss of a job.

The current base rate has been held at its record low level of 0.5 per cent since March 2009, with the previous floor being two per cent for a few months in 1951.

Evidence of consumers taking advantage of the situation to pay down debt – something some may have been able to do because they have tracker mortgages and have saved money on repayments – has been provided by credit reference agency Experian.

It has revealed 36.1 per cent of those who have asked for a copy of their credit file from it since the 0.5 per cent level came into effect have used spare cash to reduce what they owe.

By Amy White