Today I want to dive into a topic that I think more people should be discussing – debt. Specifically, how to get out of debt and how to stay out of debt.
I’ve never been in debt myself but I know there are so many people out there that are caught in its trap.
I read a few articles recently which highlighted the amount of debt people are in compared to previous years… unfortunately things aren’t looking too good.
A Financial Times article a few months back even suggested that the UK was actually in a debt crisis.
Now I know the media are notorious for exaggerating things but I think in this case, it is a crisis.
And it’s not hard to see why, here are some worrying statistics from other sources:
- Household debt for average family is more than £14,000 (TUC – The Guardian)
- 331,337 new clients called the debt charity StepChange for help in the first six months of 2019 (StepChange)
- The average credit card debt could take over 25 years to pay off (The Money Charity)
Why is there so much?
Spending Habits. Some people love spending money! It’s almost like a sport to them.
This is especially apparent around this time of the year when sales like Black Friday puts you in competition with other bargain hunters.
People end up spending frivolously and then eventually their luxury lifestyles catch up with them.
However, it’s not just spending splurges. There is also a growing amount of debt that seems to be coming from day-to-day expenses. This means more and more people are borrowing for even the essentials.
Stagnant wage growth. Why are people using credit cards to purchase the essentials? Well, it may be down to the fact that wage growth has remained stagnant for so long. Yes, it has started going up slightly but it is still far behind even what it was before the global financial crash in 2008.
Low interest rates. Interest rates have also been at historically low levels. This makes borrowing money cheap but it doesn’t provide much incentive to save.
What are some of the problems of too much debt?
Mental health issues. Having too much debt can have a detrimental effect on people’s mental health and can even cause people to feel suicidal. They may feel trapped and think that there is no other way out.
Affects relationships. Being in debt can have a dramatic impact on your relationships with your family or partners. It is one of the leading causes of arguments, separations and family fall outs.
Ability to get credit in the future. Having a lot of debt and maxing out credit cards could make it more difficult in the future when you need to borrow a larger amount, e.g. for a mortgage. Even if you do get credit, it might be at a higher interest rate meaning you pay more.
How can I get out of debt?
Here are a few ways you can get out of debt:
0% balance transfer card. One of the best ways to immediately give yourself some relief is to see if there is a way you can transfer your debt to a 0% balance transfer card.
Essentially you move your debt to one card and pay 0% interest on the debt for a set period of time. This gives you time to hack away at just the debt without paying down the interest as well.
Here’s an article on how they work and whether it would be able to help you.
FREE financial help from charities. If you really don’t know what to do and don’t even know where to start, it might be worth getting in touch with a debt charity such as StepChange. They can help you get back on track and best of all, the advice they provide is completely free.
Create a debt action plan. Take some time and create a debt action plan. By this, I mean identify how you are going to tackle your debt. There a few ways you can go about this:
- Tackle the debt with the highest interest first – this will be tough at first but will save you the most money
- Tackle the smaller debts first to build up momentum to pay off the bigger ones – this is also known as the snowball method and may be an easier way to start
Whatever method you choose, make it a goal to write it all down. This will make it much more likely that you will stick to your plan.
Create a budget. In order to pay off debt, you need to see where all of your money is going (or where it isn’t going). A budget can help you identify areas where you can save and instead put that money towards paying off your debts. If you need help creating a budget, you can check out my article here.
Sell items that you no longer need. Many people have so many items around their house that they no longer need or use. If you can spend some time digging them out, you can sell them and get a bit of cash that you can then use to pay off debts.
Be careful here though because you may be tempted to spend the money you make from selling your possessions. Make a promise to yourself that you will use the money to pay off debts. You don’t want to end up back in the same position.
How to stay out of debt
Once you are out of debt, you should feel a huge sense of relief. Well done. But stay focused because it’s so easy to get back into debt if you’re not careful. Here are a few steps you can follow to help you stay out of debt:
Sticking to your budget. Once you have created a budget and have been tracking your spending for a while, you’ll feel a lot more comfortable knowing where all your money is going.
You can use your budget to make sure that you stay out of debt. You don’t have to meticulously account for every pound but it’s a good idea to check it weekly (or even monthly) just to make sure that you’re not slipping back into the red.
Ask yourself whether you really need something before you buy it. Start building the habit of questioning all of your purchases. Ask yourself every time whether or not you really need that item. Identifying the difference between needs and wants will help you to decide whether or not it’s something that you really need or something you just desire at that moment.
If it helps, try thinking of the item not in terms of price but how many hours you would have to work to purchase the item. It might make you think twice about buying it.
Avoid payday loans at all costs. This one is an absolute must if you want to stay out of debt. Payday loans are some of the most heinous companies out there, preying on the vulnerable. Don’t let them take advantage of you or else you might find yourself trapped paying extortionate interest rates.
Using credit cards responsibly. It’s often said that credit cards can be like fire. Used correctly they can be very useful; used incorrectly and they can burn badly. If you are prone to bad spending habits, it’s probably best to refrain from using credit cards.
However, if you can discipline yourself to use credit cards correctly, you can build up good credit, earn reward points and get cheaper rates on various financial products such as mortgages and even mobile phone contracts.
The rule of thumb here is to never use credit cards to fill in income gaps. Always use credit cards to spend money that you already have.
Hopefully this information will help you get out of debt and stay out of debt. Here is a summary of the main points:
- People in the UK are going into more and more debt
- Stagnant wages, low interest rates and bad spending habits may have pushed people into borrowing more than they can afford
- Problems of too much debt can have multiple negative effects on people’s lives such as, causing mental health issues, impacting relationships and making it hard to get credit in the future.
- There are always methods and help available to help you get out of debt – some of these include taking advantage of free advice from debt charities, transferring debt onto a 0% balance transfer credit card and creating an action plan to eliminate debts.
- Once out of debt there are a few ways you can keep it that way. Sticking to a budget, questioning purchase before making them, avoiding payday loans and using credit cards correctly will help you stay debt free.
Are you or anybody you know in a lot of debt? How does it affect you/them?