If you're in debt, what can you do about it? What should you be aware of?
This article was first sent to Fools as part of our Afternoon email series.
Since the credit crunch first hit last year, financial institutions have sought to rein in their lending (and diminish our spending!) by making it more difficult to borrow. However, the amount people owe on credit cards is actually still growing.
In fact, according to the Bank of England’s latest statistics, the UK’s total consumer debt has risen to a record level this autumn. It now stands at a staggering £237.6bn, and rose by £300m between August and September alone.
A terrible trend
I think this is a terrifying trend. As our economy heads into an almost inevitable recession, now is a dreadful time for anyone to be increasing the amount they owe.
In my view, there are a few likely reasons why the UK’s level of credit card debt is stubbornly refusing to shrink -- despite the fact it’s now harder to get hold of new pieces of plastic.
If any of them is affecting you, I believe this is the ideal time to do something about it.
1. Are you filling in financial gaps?
If you’re using your credit cards to fill in your end-of-month financial ‘gaps’, you have my sympathy. Many people’s budgets have been stretched to breaking point over the past year, my own included!
However, using borrowing to cover your monthly costs is a dangerous way to deal with this situation. In the long-term, it will drive you deeper into debt and could spark a downward spiral that will be difficult to escape from.
2. Are you paying back debts that aren’t diminishing?
Alternatively, it could be that you’re making monthly repayments on existing debts which don’t seem to be diminishing. If this is the case, it might be because you’re paying a sky-high rate of interest on your borrowing.
This problem will be further compounded if you’re only making the monthly minimum repayment (MMR) on your debt. Lenders often set the MMR for their credit cards at an astonishingly low level; in the case of HBOS-issued cards, for example, the MMR is now just 1% of your credit card balance, or £5!
While this might sound like good news, it definitely isn’t. Only ever repaying the MMR on your credit card could mean it’ll take you decades to clear your balance. For example, a debt of £5,000 on a credit card charging 16.5% (and with an MMR of 2%) would take an incredible 41 years to pay off in this way! Even worse, it would cost more than £8,000 in interest.
3. Is your lender is squeezing you tighter?
Finally, another reason for the UK’s escalating level of consumer debt is the interest rate increases some lenders have imposed on their customers since the credit crunch.
What you can do
If you’re regularly relying on credit, you might benefit from the advice of other friendly Fools on our Dealing With Debt discussion board.
Re-assessing your budget and making a few clever cut-backs could also make a real difference.
However, one thing I think all Fools with outstanding credit card debts should consider is applying for a balance transfer card.
By opting for a 0% balance transfer card such as the Virgin Money MasterCard Credit Card, you could bag yourself 16 months of breathing space away from interest payments. During that time, every penny you pay towards your credit card balance will beat down the debt itself, rather than the interest that’s been slapped on top of it.
However, don’t forget that once the 0% promotional period expires on a card like this you’ll need to find another card to shift any remaining balance to. This requires organisation, and a little bit of luck too -- because if you forget to make the switch or there isn’t a suitable deal available when you need one, your debt will start attracting a standard rate of interest again.
Some Fools might therefore prefer a lifetime balance transfer card. These cards are slightly more expensive, but using one requires less effort then ‘tarting’ from one 0% deal to another. Lifetime balance transfer deals offer a low rate of interest on transferred debts, which lasts until the whole sum has been repaid. Simple.
Whichever sort of card you choose, it’s a good idea to make your monthly payments as high as you can. By refusing to fall into the MMR trap, you’ll pay off what you owe far more quickly and cheaply.
What should I be aware of?
Firstly, it is important to remember that in the current climate no one is guaranteed to get any credit card they apply for. If you’re in doubt, it’s worth checking your credit report before you take the plunge.
Secondly, don’t forget it’s usually a disastrous idea to spend on a balance transfer credit card. If you do, you’ll be hit by the dreaded negative payment hierarchy. This will mean whatever you’ve spent on the card will stay trapped at the bottom of the payment pecking order, accruing interest, until the whole of your balance transfer debt is cleared.
I might be a fashion fan, but I think the UK’s continued reliance on expensive credit cards is a trend no Fool should be following right now.
Good luck bashing your borrowing!
More: Deal With Your Debts | Dealing With Debt Collectors | How To Tackle A Large Debt
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