The credit timebomb: Tips for tackling debt

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From credit cards, overdrafts, personal loans, and mortgages – owing tens of thousands of pounds has now become a way of life.

And while some debt might be good, a growing number of people find themselves in a downward spiral and unable to get out.

The Money Advice Service published staggering figures last week which found that 8.3m people in the UK are living with debt problems, which equates to around 15.9 per cent of the population.

These figures came hot on the heels of a warning from the chief executive of the Financial Conduct Authority (FCA), Andrew Bailey, who urged the British government to take action to tackle the growing mountain of consumer debt.

Research from the financial watchdog indicates that one in six people with debt on credit cards, personal loans, and car loans are in financial distress – and many of us will have heard the warnings that “sub-prime cars” could steer us towards the next financial crash.

Read more: Subprime car loans could be fuelling the next financial crash

No safety in numbers

While there’s nothing inherently wrong with carrying manageable debt, Sarah Coles, personal finance analyst at Hargreaves Lansdown, says borrowing has become so ubiquitous that we start to get the impression that there’s safety in numbers.

With millions of people bogged down by the debt burden, people become relaxed about racking up expensive short term loans because “everyone else is doing it”, she says.

The issue is exaggerated by the rise in zero-hours contracts; the unpredictable income of a huge proportion of the British workforce normalises the borrowing trend as people try to make ends meet when money gets tight.

Coles says: “unfortunately, there’s no safety in this particular herd, because the effect of interest charges means that just like everyone else, you run the risk of gradually sinking into the mire of debt.”

While interest rates remain at record lows, it’s important for borrowers to realise the cost of this debt burden, which sometimes amounts to as much as 30 per cent on a credit card.

“From the consumers point of view, it is almost like a game,” says Aneesh Varma, chief executive of AI-credit scoring service Aire. “If the lenders are offering credit, why not try it out? Why would the lenders be offering credit if it is unaffordable for me?”

Of course lenders do not always act in the best interest of consumers, and do not always assess whether a consumer can afford a loan before granting it. The FCA is currently looking for a solution to this problem, and the Bank of England has toughened up its stress test.

But rather than waiting for regulatory action, there are some ways you can deal with your debt.

Do your research

Make sure you put in the time to read the contracts you’ve signed up to (or are about to sign up to).

More often than not, the literature for financial products will be full of technical jargon that is hard for most people to wrap their heads around.

The only way to understand what you are agreeing to is to invest your time to get your head around it, says Varma. “This is one of those areas where an hour spent today in learning can save you months of frustration down the road.”

Do the calculations

If you feel overwhelmed by an ever-mounting pile of debt, spend some time figuring out exactly what you owe.

Of course it’s also crucial to know how much interest you are paying so you can assess which debt takes priority when it comes to paying it off.

Have a plan in place for dealing with each chunk of debt, and make sure you stick to it.

Regularly keep track of your finances to see what progress you are making – just don’t ignore your bank account.

Borrow more cheaply

Once you’ve worked out which debt is costing you the most, consider switching some of the debt to a lower interest credit option in the short term.

There’s a multitude of different products and providers out there, so shop around to see how you can ease the burden.

“Look at cheaper ways to borrow, so that the sums you are wasting on paying interest can be channelled into repayments,” says Coles. “The only caveat is that this needs to be seen exclusively as a tool to help you repay your debts faster, not an excuse to spend more.”

Build a budget

It might sound obvious, but paying off debt means cutting back on spending, so look at your monthly outgoings and find out what you could save by skimping on some of those luxury items. Also examine your household bills and figure out if you can make any savings by switching to a different brand or provider.

Get some help

Trying to shrink a huge mass of debt is not easy, and you might need moral support from family and friends – particularly those who have been in a similar situation.

There are also some very helpful, neutral government-funded organisations that consumers should be aware of, says Varma. The Money Advice Service, for example, is a good starting place.

But if your debt problems become too serious to tackle on your own, then consider asking debt charities like StepChange and National Debtline for help.

The Hargreaves analyst says these organisations can talk you through your options, and help you take the steps you need to get back on top of your finances.

Out of the woods

Once you’re safely back in the black, there are still going to be times when you might need money for unexpected events. Building a savings pot to act as safety net in emergencies will stop you from falling straight back into a debt routine.

But it shouldn’t all be doom and gloom, because tackling debt doesn’t mean you have to take the enjoyment out of life.

Just opt for cheaper (or free) ways of socialising for the time being, and remind yourself how good it will feel to be free from the worry of being overburdened with debt.