The UK is heading towards a major debt crisis according to a new report from debt charity StepChange. The report finds that the number of people facing severe debt problems has doubled since the beginning of the pandemic. This is largely due to a rise in emergency borrowing among those negatively affected by the virus.
There’s no need to panic, however. While we may not know when things will get better, there are several steps you can take right now to avoid a personal debt crisis.
The effect of the pandemic on emergency borrowing
According to StepChange, close to 15 million people in the UK (a third of the adult population) have experienced a hit to their finances, such as furlough, a reduction in working hours or redundancy.
The number of people facing severe debt problems is currently 1.2 million.
The report states that 5.6 million people are already in arrears or borrowing to make ends meet. The average amount of arrears and borrowing among those affected are £1,365 and £1,577 respectively.
Worryingly, a further three million people are currently at risk of falling into arrears in the near future. As a result, total household arrears and emergency borrowing related to the pandemic have soared by 66% since May to hit £10.3bn.
How to avoid getting into a personal debt crisis
Debt can have a profound impact both financially and emotionally. Luckily, you can take action right now to avoid having to turn to emergency borrowing in the near future. Here are five practical steps to consider.
1. Start using a budget to evaluate and track your financial health
Without a budget, it’s impossible to know whether you’re living within your means or inching towards a financial crisis.
A budget can help you organise your finances, track your spending and establish areas in which you could save. It can also help you evaluate your overall financial wellbeing and even map out how to achieve specific financial goals.
If the concept of preparing a budget sounds foreign, there are a number of free budgeting sites and apps to help you create one. Most have features and services to help you record goals, categorise and track spending, and receive alerts when you deviate from plans.
2. Look for ways to earn extra cash
A budget can help you keep track of your expenses and potentially make savings. Sometimes, this alone might not be enough. You may need to increase your current income by looking for extra ways to make cash.
Today, you don’t even have to leave your home to find a side gig. The internet provides endless ways of making extra cash. A few that come to mind include teaching online courses, selling e-books, freelance writing, and taking surveys.
Check out our article on side hustles you can do from home for more useful ideas on how to make some extra cash.
3. Prepare an emergency fund
Having an emergency fund can be a lifesaver.
Without an emergency fund, you’re more likely to turn to emergency borrowing if you encounter a financial problem.
According to the Money Advice Service, if you’re able to, it’s a good idea to build an emergency fund that will take care of your personal living expenses (mortgage, food, utilities, etc.) for at least three months.
As you get started, this may seem like an unattainable goal. The most important thing is to just try to save as much as you can.
To grow your fund faster, consider putting the money into an easy access savings account. In addition to earning interest, you’ll be able to access your savings when you want without any penalties.
4. Get a better credit card deal
A credit card can be a useful financial tool in your wallet, especially when used in the correct way. But using a credit card correctly does not just mean making payments on time and not exceeding your limits. It also means ensuring that you’re getting the best deal.
For example, if you are currently carrying a balance, you could transfer it to a 0% balance transfer card to give yourself more time to pay it off without incurring more interest.
5. Increase your financial knowledge
Increasing your financial knowledge can make a world of difference to your saving, investing, borrowing and planning, among other financial habits. It means that you won’t have to experiment your way to better financial decision making.
There are several ways to increase your financial education. You can read business and finance books, consult with financial advisers, watch online videos on finance or regularly browse through personal finance websites like My Wallet Hero for useful advice.
The more you know, the greater your chances of avoiding a personal debt crisis and other financial problems.
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