How to tackle the debt skeleton in your closet



Given the rising cost of living in this country, with rents and house prices literally going through the roof, I wasn’t too surprised to read that UK household debt is at its highest in five years. In fact households now, on average, owe 26.5% of their annual income on loans and credit cards (including student loans; excluding mortgages). This is the highest level since before the recession.

It’s makes for alarming reading, but it’s easily understandable that people are increasingly having to turn to credit in order to get by. Yet while debt is never enjoyable or desirable, it is a reality for many of us, and not everyone goes about handling it the right way. Many are overly dependent on credit cards, which, after a while, can cost a fortune in interest.

The good news is that there are ways of dealing with it to avoid it becoming unsustainable, and there are easy steps you can take in order to start chipping away.

Gain control

If you think you’re prone to the occasional splurge, or think there is room for a bit more austerity in your daily spending habits, then it’s probably well worth you doing a personal finance audit. For the first month – or even just a week – record all your outgoings. It might seem redundant to write everything down, especially when it comes to small amounts. But, over and above your essential day-to-day living costs, you’ll probably be surprised at the amount you can save on your spending on yourself and your kids. Cut down on this unnecessary spending, and you’ll suddenly have a whole lot more money freed up to service your debts. You can download a free monthly budget planner from Cass at Frugal Family.

Save, or pay off debts?

The rule of thumb is that the interest you earn on savings will always be less than the interest you are charged on unsecured debt. There are some exceptional circumstances. For example, some lenders may charge you a penalty for paying off debt early, so that is something you’ll need to watch out for. But, nine times out of 10, you’ll be better off prioritising paying off debt as opposed to savings.

So it’s especially worthwhile identifying your high-interest debts, and getting those squared away as soon as you can. Some debts are also more urgent by nature, so you’d definitely want to attend to the following first if they apply to you:

  • Mortgage or rent arrears
  • Gas and electricity arrears
  • Council tax arrears

Consolidating debts

One quick and easy option to cut down on both the amount of debt you have, and the number of debts you have, is to convert all your high-interest obligations into a single, low-interest loan. Debt consolidation loans are a firm favourite among Brits given that the logic behind them is clear: by undercutting the levels of interest on your overall debt, you’re immediately better off. What you must be sure to clarify first is whether the rate being offered on the debt consolidation loan is lower because the term is spread over a longer period of time, or if it is actually making you better off in relative terms. Either way, it is worth shopping around for some quotes to find out.

Making a life of debt cheaper and easier

Hopefully the above can really help your cause to get out of the red. It can take time, but if you stay committed, it’s a tunnel that you can easily emerge from intact, while still enjoying life along the way. Here are some final tips to help your cause too:

  • Look at setting aside some of your wages each month so you have money to fall back on. Especially as a parent, you should expect the unexpected
  • Paying with cash instead of credit cards is a good habit to get into
  • Keep an eye on your bank accounts regularly to avoid going into overdraft. If you think you will go overdrawn, or that you will exceed your overdraft limit, get in touch with your bank. The last thing you want is to go into unauthorised overdraft, which incurs hefty charges
  • Have a separate bank account for different things. On pay day, you can squirrel money away to cover all your direct debits for the month, or you can use it as a ring-fenced account to allocate money into for the purposes of servicing your debts, thus avoiding the temptation of spending it
  • Also, if you think you need debt counselling, it’s available from your local Citizens Advice Bureau for free, or they can refer you to a money advice specialist if need be

Coins and key image courtesy of Shutterstock.

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