The past 18 months have been challenging for everyone. And as we start to emerge out the other side of the pandemic, a lot of us are taking stock of the financial situation we now find ourselves in. You may well have seen your income reduced during successive lockdowns and now find yourself with higher levels of debt.
In this article, we will break down ways to reduce your debt, making it cheaper and more manageable to deal with.
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Do you have Covid debt?
A recent study by Aviva found that 24% of workers feel they made a bad decision about debt during the pandemic. This creeps up to 51% of those aged 18 to 24, with young people being one of the hardest-hit groups in society.
More worryingly, almost a third of workers had to borrow to replace lost income. While the furlough scheme provided some form of support, it only covered 80% of wages, up to a cap of £2,500 a month. As a result, some households plugged the gap by borrowing.
How can you reduce debt?
If you have high levels of debt, then it could be a good idea to speak to a non-profit debt counselling service. Some of the main services to consider are the StepChange debt charity, Citizens Advice and National Debtline.
There are also steps that you can take straight away.
Prioritise your debt
If you have multiple debts, then the first thing to do is to work out which need to be dealt with first.
Typically, you should look to address debt emergencies like court actions or bailiff actions first. Then turn your attention to priority debts such as council tax or mortgage arrears. Finally, address expensive debts like credit cards, personal loans or overdrafts.
Consider using your savings
In order to reduce your debt, you could use your savings. While you may not want to let go of your emergency fund, the reality is that whatever interest you are earning on your savings is not going to offset what you are being charged on outstanding debt.
That said, it is worth keeping some ready cash available in an easy access savings account. This will ensure you can cover unexpected expenses like your boiler breaking or car repairs.
Cut the cost of your debt
It may be that you are bogged down by high interest rates. In order to reduce your debt, it could be an idea to see if you could cut the cost of your borrowing.
What options are available to you will largely depend on your credit score.
For example, you could look to get a balance transfer credit card with a long interest-free period. This would get you out from under higher interest charges and give you a platform from which to pay off your balance.
Just make sure you don’t add more debt to the card. Instead, make a repayment plan that will ensure you clear your balance before the promotional period ends.
Alternatively, you could take out a cheap personal loan. The caveat to this is that it is not always a good idea to take on more debt. This scenario only really works if the interest charged on the loan is significantly lower than the interest you are already paying.
It’s all about reducing the cost of borrowing. So the loan could repay the more expensive debt, and then you could focus on structured repayments to clear the loan.
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