Out of interest

Usury is defined as the practice of making loans that are unfairly enriching the lender. And we must take comfort that most lenders in the UK are limited by legislation to keep rates charged at a reasonable level; unless, of course, you are a loan shark.

Banks are the biggest lenders, and you may have noticed that they always charge more for lending funds than they are willing to pay you if you deposit funds with them.

This spread on rates paid and charged provides a major contribution to lenders’ profits.

How this “interesting” topic can impact your own financial and business arrangements is the subject of this short article today. The comments made are generalities and before seeking to act on any suggestions made, please take professional advice.

Credit cards

Most credit card providers charge interest on unpaid balances at high rates. According to Which magazine the average APR on a credit card is 35.1% with the best low-rate option charging 10.9%.

Tips re management of credit cards:

• You will need to check the T&Cs for your card(s), but most card providers will give you a set number of days to fully pay balances on your card account for the previous month, and as long as you do this, no interest becomes payable.

In which case, you could restore a little liquidity into your household or business finances by paying for your household or business costs by card in this way. Note you must pay the full balance owing by the deadline date otherwise interest charges will be added. The best way to organise payment is to authorise monthly settlement of outstanding balances by direct debit.

• If you have credit card accounts where there are outstanding balances and interest is being added, and you have savings, you could consider clearing some or all of the debt by reducing savings. You would then reduce or perhaps eliminate the cost of the interest spread (difference between interest charged on cards and interest received on savings).

Savings

Aside from the interest rate spread issue described above, interest paid to you on savings will form part of your taxable income unless you can claim various reliefs that would exempt you from a tax charge.

Unfortunately, the interest cost of maintaining an unpaid balance on a personal credit card account would not be a qualifying deduction for tax purposes – unless the account was a business card qualifying as an allowable business cost.

Generally, it is worth considering reducing savings if you can apply the funds to reducing credit card debt.

Mortgage debt

A couple of observations:

• If you can afford to pay off more than you are requested to pay, these additional monthly payments, if made consistently, will act to reduce both the total interest charged on your mortgage account and create an earlier settlement date.
• If your parents are hale and hearty and have spare funds that will be your inheritance at some future date, they could gift you a sum to reduce your mortgage and as long as they live for seven years after the gift was made, no Inheritance Tax would be payable.

If you need help based on the comments made above, please call so we can help you consider your options.