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FOOL'S EYE VIEW
I spend a lot of time worrying that Britain is drowning in debt. If you don't agree with me, then consider this: at the end of April 1993, our unsecured debts (credit and store cards, car and personal loans, overdrafts, etc.) totalled £51.4 billion. By the end of October this year, this figure had soared to £191.4 billion. In other words, our non-mortgage debt has increased by £140 billion in just 12½ years. Aha, but our take-home pay has increased over this period, so this extra debt isn't a problem, right? Wrong, because our debt has been growing by over 11% a year on average, whereas wages haven't grown at anything like this pace! Amazingly, on at least one measure, we are now more heavily indebted than our US cousins. Still, if your debts are proving to be a burden, don't get down in the dumps. Simply use the following ten techniques to dynamite your debts for good! 1. Become better at budgeting The more disposable income that you have to throw at your debts, the faster you can pay them off. Therefore, you need to slash your expenses, boost your income and learn to budget. To get you started, try reading these Fifteen Fabulous Money-Saving Tips and these 25 Quick Money-Saving Tips. 2. Transfer your debts to a 0% credit card As I explained in Your Ultimate Guide To Credit Cards, you don't have to pay interest on your unsecured debts. Simply transfer your outstanding balances to a 0% on balance transfers credit card, which gives you a breather from paying interest which can last for up to a year. Alternatively, if you can't be bothered to be a "rate tart" (someone who surfs their debts from one 0% card to another), then move your debts to a card with a low long-term rate for balance transfers. Why pay 20% a year when you could be paying 4.9% APR? Check out this deck of cracking 0% credit cards! 3. Switch personal loans If you have a personal loan at the moment, and you didn't shop around for it, you could be paying well over the odds. For example, by borrowing from a Best Buy lender it's possible to borrow £5,000 over three years and repay just under £5,440 in total. However, pick the wrong lender and exactly the same loan could cost you over £6,500. Ouch! Hence, try getting a settlement figure for an existing loan and then using our search engine to see if a lower rate will save you money. You'll find your perfect personal loan in our Loans centre! 4. Use your savings to reduce your debts What happens if you owe £1,000 on a credit card that charges annual interest of 20%, while at the same time you keep £1,000 in a savings account earning, say, 3% after tax? Yup, in effect, you're losing £170 (17%) a year! Indeed, there's no point in having a big emergency fund or nest egg while you also have sizeable interest-bearing debts. You'd be far better off leaving yourself with a modest level of savings and using any surplus to reduce your debt burden. Check out the ace accounts in our Savings centre! 5. Forget about minimum monthly repayments (MMRs) If you want to experience real financial torture, pay only the minimum monthly repayments on your credit card! Naturally, the lower your minimum monthly repayment, the longer your debt will take to pay off. For example, if you pay an MMR of 2% on a debt of £2,000 with an interest rate of 19.6% APR, it will take you over 42 years to pay off the entire balance. In total, you'll repay £7,466, which is your original two grand plus £5,466 in accrued interest! If you don't want to be murdered by MMRs, read how to Turn Nasty Cards Into Nice Cards 6. Throw a "snowball" at your debts Let's say that you receive a windfall of, say, £100 and decide to use it to reduce on of your debts. Which is the smart thing to do: pay £100 off the store card that charges 30% APR, or use it to pay £100 off your credit card that charges 12% APR? Obviously, the wise move is to pay off your most expensive debt first, because you pay less interest in the long run. This is the principle behind snowballing, where you throw your spare cash at your most expensive debt first, then the second, then the third, and so on until all of your debts have been settled. Snowballing is probably the best way to tackle multiple debts. 7. Contact your creditors If you have multiple debts and spend your time robbing Peter to pay Paul, it's time to contact your creditors. If you feel nervous about calling lenders, write to each with a statement of affairs, which is a table of your income, outgoings and debts. If your debt problem is more than trivial, you should ask each lender to freeze the interest on your debt and accept reduced repayments. If you think that this would be beyond you, contact one of the FREE debt-counselling services, such as the Consumer Credit Counselling Service, National Debtline or Payplan. 8. Consolidate your debts This option - rolling up all of your debts into a single loan - only works if you have already come to terms with the reason why you're in debt in the first place. We call this a "lightbulb moment", when you realise the real reason why your finances are in a mess. For most people, the underlying problem isn't an unforeseen event, such as illness, unemployment or relationship. No, most borrowers are guilty of nothing more than financial mismanagement or overspending. Then again, if you are able to master your money, then swapping expensive debts for a cheap unsecured personal loan may be an option worth pursuing. But be warned, one Foolish survey showed that six out of seven people who arranged a consolidation loan admitted to running up yet more debts further down the line. Thus, tread carefully before leaping at a loan - and read Five Tips To Choose A Loan first! Check out the ridiculously low rates in our Loans centre! 9. Remortgage To me, taking out a secured loan, second mortgage or remortgage should be the last option on your list. That's because rolling up unsecured debts and securing them against your home can threaten the very roof over your head. Moreover, if you're having trouble keeping up the repayments on your credit and store card, personal loans and so on, what makes you think that you'd do any better by swapping these for bigger mortgage repayments? If you need any more convincing, read Your Home Could Become A Prison and then think again, because this option really is your last resort! 10. Let the Fool help you In my three years here at the Fool, I've written scores of articles of the dangers of debt. But it seems the vast majority of borrowers haven't paid a blind bit of notice. In spite of this, I know that the Fool really does help people who are struggling with debt. So, if you, a friend, relative or work colleague would like more help with coping with debt, check out this Foolish support: Good luck with destroying your debts! Visit these centres for more help: Get Out of Debt | Credit Cards | Personal Loans | Mortgages | Savings.