It’s a sad fact that very many people these days are saddled with debt. This debt includes personal loans, credit cards, overdrafts and mortgages. Back in 2001, the total US household debt just from credit cards was a whopping $560 billion, averaging out at $11,000 per household. (1) By 2008, however, the figure had risen still further to $790 billion! (2)
We’ve certainly come a long way from the never a lender nor a borrower be’ ethos and, in some ways, it is good that the stigma that used to be attached with debt has lessened in recent decades. However, the availability of credit facilities has spiralled and there’s no doubt that there are many people these days who find themselves buried under an avalanche of monthly debt payments. The real danger arises when you are struggling just to pay off the accruing interest, never mind pay back any of the capital amount.
Becoming debt free may look a million miles away but I think most people would agree that it is a desirable financial goal. The good news is that, for many, it will be achievable to pay off the debt within just a few years and this article looks at how you can achieve this.
Let’s look in turn at the various types of debt and how to minimise them:
1. Credit cards
Switch to a credit card with a lower rate. Some offer 0% for 6 months’ type deals. Switching to a better credit card will make you a substantial saving.
Endeavour to pay off your credit card in full each month. If you can’t do this, then at least make sure that you pay back the interest and try to also pay back a bit extra. This will start to pay off the capital amount and prevent extra interest from adding to it.
The real danger with overdrafts is if you slip into an authorised overdraft position. Unauthorised overdrafts come with very high interest rates and penalty fees. Authorised overdrafts, on the other hand, are usually fee free and have a lower interest rate. Your overdraft-related goals should therefore be:
Make sure you don’t exceed your authorised overdraft limit. This will ensure that you don’t incur fees.
If you are finding it difficult to prevent your balance from dropping below zero, then ask the bank for an authorised overdraft. This will provide a buffer zone against incurring fees but you should only use the authorised overdraft when you have no other alternative.
Pay off any unauthorised overdraft as a top priority. The fees associated with unauthorised overdrafts make them even more costly than credit cards, so you need to stop the haemorrhaging that they will cause to your funds.
If you don’t trust yourself not to exceed your overdraft limits, then ask your bank to switch you to a basic bank account that doesn’t allow you to go overdrawn. In the UK it’s mandatory for banks to offer these products and they will eliminate the threat of incurring overdraft charges. The downside is that they only provide a cash card and not a debit card.
3. Personal Loans
Don’t miss any loan payments, so that you don’t incur any charges
Where allowed, consider increasing your loan payments (or making a one-off lump sum payment) so that you pay off the loan quicker. The rule is that the sooner you pay off the loan, the cheaper the loan will have been, as you will have incurred less interest on top of the capital amount borrowed. However, some loans don’t allow you to repay early so check the loan conditions.
Consider switching to a cheaper loan. Some of the best rates that you can get are for Internet loans. You can also use money comparison websites to find the best deals.
Consider consolidating credit card and overdraft debt onto your personal loan. Loan rates are often lower than credit card or overdraft rates, so one way to pay all your existing debt off quicker is to get it all moved onto a loan.
Mortgages are the biggest debt that we will ever incur but at least we have the benefit of knowing that we will hopefully have obtained a good investment at the end of it, when we fully own our own home. Paying off your mortgage early will save you a heap of money, so here are the general tips on mortgages:
Make sure you’re on a competitive interest rate. Switch to a better deal if you’re not. A 1% saving may not seem like much but on a $200,000 mortgage, over a 20 year term, it may add up to a very big cost saving.
Increase your mortgage payments (or make lump sum payments) whenever you can comfortably afford to do so. Again, this is subject to this option being available on your mortgage. Shaving a few years off the repayment term will bring a huge cost saving.
Underpinning all these elements, at a more basic level, is the need to be able to astutely manage your monthly finances. Budgeting is at the heart of this. You only have a finite monthly disposable income and you need to drive your costs down so that they are lower than that income amount. Setting yourself monthly targets (and monitoring progress against them) is a good way to ensure that you remain focused on improving your debt position.
Finally, if you still find that you’re not making a dent in your own personal debt mountain, then speak to your bank to discuss options. It’s always better to talk about debt problems rather than burying your head in the sand and hoping that they will go away. If you feel uncomfortable about speaking to your bank, then there are other organisations (such as Citizens Advice Bureaus) that will be able to offer guidance. One of the things that they will stress to you is that you are not alone. There are thousands of people in a similar position and many examples of people who have brought their finances under control and for whom debt is now thankfully a thing of the past.