Martin Lewis has issued an alert to anyone with a debit card from major banks including HSBC, Barclays, Lloyds, NatWest, Santander UK and Nationwide, saying they are 'more dangerous'. The personal finance expert explained that people often use debit ahead of credit cards because of interest rates, but this could be a mistake and people can be hit in the pocket badly.
Interest rate differences
Lewis 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.'
He noted that many people who have both debts will use money in their bank account to try to pay off the credit card. '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.'
Snowballing strategy
Lewis advised that if you have more than one debt, the sensible move is to list them in order of interest rate and focus on the highest rate debt, likely the overdraft, while paying 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.'
Credit card rule
Lewis has previously said there is a key rule for people with credit cards: make sure you pay it off in full every month. On his BBC Podcast, using a £1,000 scenario, he said: '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.' He added: 'This is why for years my catchphrase has been pay off your credit card in full. The in full is important.'
