These are the bills you should not pay off

The sudden, steep, but entirely anticipated recession means we are all being told again and again to build up our emergency cash and, whatever we do, pay off those debts as fast as we can to shore up our finances for the turbulent times ahead.

For the most part that’s absolutely the right advice. But not always.

Those facing serious problem debt should seek specialist, individual advice from a debt charity such as StepChange, which can put together a personalised plan to pay off debts or write them off.

But if that’s not you, and you’ve been able to start sorting your money matters out with some unexpected Covid cash, or the crisis has driven you into annoying but broadly manageable levels of debt, here are some strategies you could employ.

Pay off: credit cards & overdrafts

We’ve always known that credit cards are a pricey way to borrow money but now, with the new rules on overdraft charges backfiring to produce a typical interest rate of 40 per cent, overdrafts in particular are painfully expensive, though we don’t always realise it.

You’re absolutely right to pay these off as fast as possible, and that of course goes for any store cards, doorstep borrowing or payday loans too – the most expensive forms of mainstream borrowing out there.

Though the “snowball” method of paying off the smallest debt first is becoming popular for its psychological boost, experts urge debtors to focus on clearing the most expensive debt first. That’s probably your overdraft. Clear it then consider cancelling the facility if you possibly can. It’s just not worth it.

Meanwhile, with the number of long 0 per cent balance transfer deals on credit cards dwindling, the days of bouncing between free borrowing deals to your heart’s content without ever paying anything back are fading fast.

Start by getting the balances on all your cards to under half of the total available credit to reduce the effect on your credit score. Then pay them off fast and hard in full.

Perhaps pay off: mortgages & personal loans

Longer-term loans with lower interest rates sometimes don’t even feel like debt, they simply sit in our brain under a file labelled “bills” as if they are a necessary constant in life we can’t get away from.

But overpaying a mortgage or loan even by a couple of pounds each month could significantly reduce its length and, therefore, the amount of interest you eventually pay overall. But there are caveats.

First, these products often have early repayment charges (ERCs). Mortgages in particular will often charge you if you repay more than 10 per cent of the outstanding balance during your fixed period or first couple of years.

Car loans often carry similar penalties depending on the kind of finance you arranged to fund it. You may need a lump sum to pay off car finance and could be restricted on when early repayment is possible.

Second, once you’ve paid back the money, it is gone. So if you then find yourself, say, in the middle of an economically corrosive pandemic and need some extra cash to see you through, these are not products that will flexibly spit some cash back out, even if you are a model borrower. And by now you may have used your payment holiday options up too.

Have an emergency fund in place worth between three and six months of your typical living costs before you start down the overpayment path.

There’s also the question of whether overpaying a long-term, low interest rate debt is the best use of your money. Today’s terrible cash savings rates, even on fixed-rate offers that lock away your cash for several years, may not give you more back in interest than you would save on the loan.

But investing the money instead could beat our current ultra-low interest rates, especially with such a long investment horizon. It is certainly something to get input from an independent financial adviser about though as stock markets are volatile places, especially at the moment, and some investment vehicles carry ridiculous management charges.

Don’t pay off: student loans

Around 130,000 England-based graduates made extra voluntary repayments in 2019/20 at a value of £2,740 each. Another 10,600 people paid back an average of £4,310 before any cash was due.

But it may have been a pointless exercise.

A student starting university this year and taking full tuition fee and maintenance loans could end up owing more than £61,500 by the time they leave, Hargreaves Lansdown has calculated. To pay it back in full, they’d need a graduate salary of £53,100 – assuming they don’t take any career breaks and get pay rises.

Back in the real world, the average annual repayment now stands at less than £1,000 a year – up only £120 in the last decade.

Unsurprisingly, the Institute for Fiscal Studies (IFS) found that only 17 per cent of graduates will end up repaying their loan in full.

“It’s worrying sending your children off to university to rack up tens of thousands of pounds worth of debt – and nobody likes the idea that most will be repaying it into their fifties,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.

“But by focusing on official student loans, we can end up wasting money – and overlooking the real problem debts students pick up along the way.

“Most graduates won’t come close to paying off their student loans before they’re written off. However, many are so worried about carrying the debt that they make extra repayments.

“For some people, this will be a sensible approach based on careful calculations, but for many there’s a real risk these extra payments will be a waste of money,” she warns.

“Meanwhile, during their studies, they will have picked up thousands of pounds worth of borrowing that could come back to bite them.”