A recent report has stated that the average household debt is set to grow to almost £10,000 by the end of 2016.
While borrowers are feeling confident about being able to keep on top of their debts, especially in more financially stable times following years of uncertainty, the risk of rising interest rates could find some households struggling to keep up with repayments.
Even though these tips to help manage your debt have been repeated time and time again, as more and more UK households are starting to borrow again, it is worth highlighting some of the ways you can get back in the black.
Budget for the best
If you’re trying to get yourself out of debt, you need to ensure that your incomings and outgoings are carefully managed. While you may be confident of your ability to pay back each of your monthly requirements, sometimes little extras can add up, leaving you short at the end of the month.
It can help to set up a spreadsheet, work out your exact income and all of your outgoings so you know what you’re left with for the month. Ensure that all of your direct debits (mortgage/rent, bills, credit card repayments etc.) are set to come out just a few days after payday – that way you’ll not be left with a direct debit taking you overdrawn a few days before your next wage is due.
It may make sense to set up an additional bank account, where you deposit your outgoings straight after payday, and re-direct all your direct debits from there. Some accounts will even give you up to £150 for switching, which can give your debt repayment a little boost. Plus, they’ll even switch most of your direct debits for you these days too.
An independent financial advisor is likely not an expense you can afford if you’re looking to eradicate your debt, though once you’re no longer reliant on credit and are looking to boost your finances in the future, they can be an invaluable source of advice.
Transfer your credit card balance to a 0% APR offer
The total credit card debt in the UK stands at around £4.2 billion – with the average credit card balance rising to £1,020 at the end of 2014.
Even though the bank’s base rates of interest are the lowest they’ve ever been at 0.5%, credit card interest is charged at an average of 18% APR (Annual Percentage Rate).
If you’re paying your credit card debt back slowly, you’re paying interest on top and it’ll be eating even more into your monthly finances, and for a longer period of time too.
Many credit card providers now offer 0% balance transfer cards, where you can transfer the debt from one, interest-paying card, to another card with 0% APR. These can vary from 12 months up to a current 36 month offer. You’ll usually pay a percentage fee for the initial transfer, but provided you pay back the whole balance before the 0% period is over, you will have only paid back the actual money you spent, rather than any unnecessary interest.
If you’re not sure you’ll be able to pay back the whole thing in a 0% APR period, you can get low rate credit cards over a longer period that may be of more use.
Consolidate your debt
Sometimes, having different debts owed to different creditors can mean multiple repayments each month, adding up to an unmanageable amount, tumbling you further into financial difficulty. Whatever you do, try to avoid payday loan companies wherever possible: while they might make the repayments seem manageable, they charge astronomical rates of interest, and can drive you even further into money problems.
It can be an option to consolidate all of your debts into one, more manageable payment with the use of a personal loan.
There are some good loan deals to be had out there, with low annual percentage rates. The benefit of consolidating your debt into one place is that loan payments are typically fixed (but not always), so the payment you agree at the start of the term will not increase if interest rates start to fluctuate, and so repayments can be easier to manage.
It’s likely you will be paying back a larger amount over a longer period of time, however the monthly payments should be smaller and more manageable than having to pay multiple creditors.
If you find yourself able to, you may also find it beneficial to pay off more than your monthly repayments at certain points through the term, shortening your repayment term and thus, the amount of interest you’ll pay overall.
Don’t bury your head in the sand
If you’re really struggling to make the repayments on your debts, the worst thing you can do is stuff your bills and statements into a drawer and forget about them. Missed repayments can seriously impact your credit rating, affecting your ability to get credit later in life, e.g. for a mortgage or personal loan.
Often just explaining to your creditors that you are having problems repaying what you owe may be enough for them to help you in some way. This could be in the form of a repayment holiday, a reschedule of the payment deadline, or negotiation of a repayment scheme to clear any arrears.
Alternatively you can seek free debt advice from numerous debt charities, including StepChange and My Money Steps from the National Debtline.
They can help you to prioritise your debts, negotiate with creditors and may even offer a debt management plan, helping you to work out what you can afford before coming to an agreement with some of your creditors about reduced payments.