Find the best cure for your debt hangover

How to cut the credit-card bill

It's that time of year again - the celebrations are over and now we have to pay for them. Most of us have overspent, even those who started out with the best of intentions. So what is the best way to pay off the debts?

It's that time of year again - the celebrations are over and now we have to pay for them. Most of us have overspent, even those who started out with the best of intentions. So what is the best way to pay off the debts?

First, don't ignore bills in the hope that they will go away. If you can't meet the repayments, tell your creditor. There are a number of independent helplines such as the National Debtline and Consumer Credit Counselling Service (see below) which can help.

It also pays to look at debt as part of your overall financial situation. Work out how much you can afford to pay back now. If you have spare cash sitting in a bank account earning a paltry rate of interest, for example, use it to pay off some credit card debt. That £100 in a current account might earn a couple of pounds interest over the year. But pay off £100 on your Barclaycard bill instead - 19.9 per cent APR (annual percentage rate) - and you could reduce the annual interest payments from £199 to £179.10.

Remarkably, a large number of people stay loyal to a credit card provider even though competitors offer cheaper rates. It is amazing that hundreds of users still pay an annual charge of £10 or more when new kids on the block such as Morgan Stanley Dean Witter not only do not charge but actually pay the customer to spend, giving 1 per cent cash back on all purchases.

It might be too late to undo the spending, but minimise the damage by checking out how much interest you are paying on your card. If the APR is more than 10 per cent, you should switch to another provider.

Not only are there loads of good deals, it is quicker and easier than you think. Tesco is charging an introductory rate of 4.9 per cent on debts transferred from another credit card as well as on any new purchases made. The rate is guaranteed until January 2001; then it reverts to the standard 14.9 per cent. If you have not cleared the debt by then, there is nothing to stop you switching again to a lower rate elsewhere.

Not all cards offer such a good deal. Some give cheap transfers but charge more for those who continue borrowing. The Newcastle Building Society Platinum Plus card, for example, has a 4.9 per cent APR on transferred balances for the first six months. This then goes up to 15.9 per cent, which is also the rate charged on new purchases.

To get round this you could pay off your old debt on this card, while using another card with a lower rate - say Egg's 9.9 per cent standard rate - for any new purchases you make.

While there are plenty of good deals on credit cards, store cards are not so attractive. Many offer incentives but the majority charge staggering amounts of interest. Marks & Spencer, for example, charges 25.7 per cent. So unless you can pay off the balance every month, cut up the store card and pay off what you owe. You might consider a personal loan to enable you to do this, and this goes for credit card debts too.

The advantage of personal loans is that they are less flexible than credit or store cards so are great for making debt repayments more manageable.

The market is rife with lenders offering low rates. "With a personal loan you can budget repayments into your lifestyle and, as the debt reduces, actually see that there is light at the end of the tunnel," says Alison Arnot of Direct Line.

An increasing number of lenders are abolishing redemption penalties for people who repay their loans early. This creates greater flexibility should your financial situation improve over the term of the loan.

If you do decide to opt for a loan don't just focus on the APR, which can be misleading as not all rates are calculated using identical indices. A better comparison would be the monthly repayments and the total you would end up paying back.

Check out www.money-supermarket.com for some of the best rates. At the moment, on a £1,000 loan over one year, the best lenders are Fleming Premier, Northern Rock and National Counties Building Society. Of the banks, Abbey National and the Co-operative are the most competitive.

Other considerations to take into account include whether or not you want a secured or unsecured loan. "Secured loans are often cheaper than unsecured, but it means your home is at risk if you do not keep up your payments," warns Nicolette Dawson, a spokeswoman for HSBC. Lower rates can also be available to graduates or new current account customers, so it is worth checking if you are eligible for any special terms.

Contacts: Consumer Credit Counselling Service, 0800-138 1111; National Association of Citizens Advice Bureaux, 0171- 833 2181 or www.advice-guide.org.uk; National Debtline, 0808-808 4000; Tesco, 0800 406050 or www.tesco.co.uk/finance; Egg, www.egg.com; www.money-supermarket.com