Household debt is rising around the world. In the UK, for example, the latest figures from the government reveal debt to be 128.7% of household disposable income in the third quarter of 2020. That, according to The Money Charity, means that the average adult in the UK has £3,838 of unsecured debt and average credit card debt of £2,133 (as of November 2020). Of course, the averages hide the fact that millions have no debt at all and others will have significantly more.
March 22nd to 28th is Debt Awareness Week and a great time to reset your relationship with debt and set yourself on a more constructive financial path. Here are our top tips for getting – and staying – debt free.
1. Understand that some debt is good….
Certain types of debt can be good. This includes debts such as mortgages, business loans and student loans which are an investment in the future whereby the value of the purchase outlasts the loan and interest rates are lower. This type of loan should be taken out with careful consideration over how and when repayments will be made to ensure that these are achievable within your budget.
2.…. but most debt is bad
Bad debts, on the other hand, are for purchases which will not increase your wealth. The purchase will depreciate below the cost of the loan and the money borrowed will be subject to high interest rates. Examples include credit card debt, store card debt and car loans.
3. Stop credit card spending
If you have resolved to deal with your debt, the very first step is to stop accumulating bad debt. That means curbing spending and living within your means. The most effective way is to cut up your cards and delete the information from your computer. If you can’t bring yourself to do that in case you might need them for an emergency, lock them away so that using them requires effort enough to make you stop and think whether what you’re about to buy is really necessary.
4. Make a debt inventory
Often people who have accrued debt are too afraid to take a proper look at just how much they owe. If you’re the type of person who has set up direct debit payments to make the minimum repayment each month while your unopened bills pile up, chances are you may be loathe to confront the amounts due. But face them you must if you are aiming to get debt-free.
5. Work out a debt repayment budget
Once you’ve pledged to get your debt down to zero you need to commit to paying off a certain amount each month. You might think that you have no spare cash to put towards debt repayment but closely inspecting where your income goes each month can often reveal some surprises in terms of unnecessary expenditure. Common culprits are unused gym memberships, an unhealthy reliance on a morning Starbucks or fast fashion purchases which are never worn.
6. Pay off debts with highest interest first
Write down out exactly how much interest you are paying on your different debts and produce a priority repayment list starting with the debt with the highest interest and working logically through until they are all paid off.
7. Look at consolidating debt
It may be possible to consolidate debt and make use of zero interest balance transfer periods so that every penny you are paying is reducing debt rather than paying off interest. Getting to zero will be much quicker but you will need a good credit score to be able to switch to a new card.
8. Ask your card provider to reduce your interest rate
It is estimated that credit card companies write off £4million of debt every single day. With that in mind, it is always worth asking your credit card provider if they will consider reducing the interest rate on your card. They might refuse but if you don’t ask, you don’t get! Reducing the rate will reduce the amount of interest added to your debt each month and enable you to pay off your debt faster.
9. Pay off more than the minimum balance each month
According to The Money Charity, if you make only the minimum repayment each month, a credit card on the average interest would take 25 years and 1 month to repay.
And here’s how you can easily end up paying $400 in interest on a $1000 loan:
You can see why credit card providers LOVE clients who only pay the minimum balance on their cards. Don’t fall into their trap.
It may feel like an uphill struggle but you CAN get debt-free. And once that goal is accomplished, you can move on to saving and investing to build wealth and secure a much healthier financial future. Don’t wait, start your journey to financial security today.
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