Martin Lewis has warned anyone with a debit card from major banks including HSBC, Barclays, Lloyds, NatWest, Santander UK and Nationwide, saying they are “more dangerous”. A personal finance expert explained that people often use debit cards instead of credit cards because of interest rates.
However, on Facebook, Mr Lewis, who regularly appears on ITV and the BBC, said it could be a mistake – and could cost people a lot of money. He said: “Is your debit card really a secret debt card? A lot of people say credit cards are bad and debit cards are good, but in reality the typical interest rate on a credit card is 25%.
“The typical overdraft interest rate is 40%. So, of the two, spending on a debit card if you’re overdrawn is more dangerous than a credit card, although neither is good, of course. Now we have to take this fair step with logic. Many people who have both debts will actually use the money in their bank account to try to pay off the credit card. But think about it.”
He said the problem arises because people don’t realize the difference in interest rates and end up paying more: “What this really means is that you’re increasing the amount of more expensive debt in the overdraft to reduce the cheaper debt. You’d be much better off just making the minimum monthly payments on your credit card and focusing on paying off the overdraft.”
“In fact, if you have more than one debt, the smart move is to always list them in order of interest rate, and then you take the debt with the highest interest rate, which is likely to be your overdraft, and put all your spare cash into trying to pay it off, while paying the minimum on everything else.
“Once you pay it off, you focus on your second largest debt and try to pay it off, and so on, and so on. It’s called snowballing. And hopefully it will help you get debt-free a little faster.”
However, he has previously said that people with credit cards should remember the main rule: pay them off in full every month. The money-saving expert tackled the topic in his latest BBC podcast, answering a listener’s question about the best savings management strategy. Using a £1,000 scenario to illustrate his point, he said: “This is an important warning about how credit cards work. Imagine spending £1,000 on a credit card.”
He continued: “If you then pay off £1,000 and you pay it off in full, then there’s no interest that month. But if you pay off £999.99, then you’re just a penny short. You don’t pay a penny of interest for the month. You’re still paying interest on the whole £1,000. That’s why for years my catchphrase has been to pay off your credit card in full.”
“The full amount is important. I talk about this when it comes to credit card rewards, say, for cash back or cheap credit card spending abroad. Because if you go for the full amount, you’ll eliminate the credit card’s ability to charge you interest. If you miss a penny, you could still be charged a pretty penny.”