Tips for managing and reducing your debt

Debt comes in various forms that most of us will encounter at some point. These include student loans, mortgages, car loans, personal loans, and credit card debts. If debt is not managed well, it can become a significant burden.

Financial stress can be all-consuming and debts can quickly spiral out of control if regular repayments aren’t made. In this blog, we’ll explore why it’s important to manage your debt, what debt consolidation is and when it’s a good idea, and some strategies you could implement to pay off your debt and regain control of your financial wellbeing.

Why good debt management is important

When you have good debt management, you’re more able to maintain financial health and stability. By making informed decisions about borrowing and repayment, staying on top of repayments to avoid late fees, and being alert to high-interest rates, you can keep control of your finances.

Bad debt management can negatively affect your credit score, preventing you from being able to secure future opportunities. If you have a good credit score, you’re more likely to be approved for better deals on mortgages, loans and credit cards. By getting better deals, you’ll save a lot of money in interest in the long-term.

What affects your credit score?

There are many factors which can positively or negatively affect your credit score. There are many providers who can show you your credit report for free online.

Factors which are good for your credit score include:

Only borrow what you can afford and ensure you’re able to meet the regular repayments on any debt taken out.
Direct debits and regular payments look good, so set up direct debits for payments such as a mobile phone bill or credit card payments.
Keep balances low as it reflects well if you keep the amount you owe less than the amount you’re allowed to borrow.
Credit scoring generally looks at the average age of your accounts, so keep your bank accounts long-term and well-managed.
Register to vote at your current address as this confirms who you are and where you live.
Check your credit score regularly for accuracy.
Be vigilant and make sure any suspicious charges on your account are investigated, as fraud or identity theft can impact your credit score.

Factors which can have a negative impact on your credit score include:

setting up new bank accounts too frequently
being close to your credit limit
applying for credit too often
missing repayments on credit you already have
borrowing more than you can afford to pay back.

The best way to use a credit card

You should only take out a credit card if you can afford to make the monthly repayments on it. When you’re shopping around, pay attention to the interest rates on offer so you have an idea of how much it’ll cost you to use the card.

Using a credit card responsibly requires you to:

Pick a card that works for you and what you need it for.
Always make payments on time.
Only spend what you can afford to repay.
Keep credit card balances low.
Understand how credit scores work and how your credit card can affect it.

What is debt consolidation and when is it a good idea?

Debt consolidation is a debt management plan where you roll old high-interest debts into new debt by taking out a single loan or credit card. In doing this, you only have one monthly repayment to make rather than several, and can potentially benefit from a lower rate and lower monthly payments.

Before taking out a debt consolidation loan, you should calculate how much you’re currently spending in interest on existing debt and how much you’ll pay on the new debt. While the interest rate on the new debt might appear lower, it’s also important to check the length of time it would take you to pay off both in full as, if the new debt is longer, you may end up paying more overall interest.

If the amount of interest repaid is lower than your existing agreements, debt consolidation might be a good idea. Some balance transfer credit cards also offer incentives such as a 0% interest rate on your balance for a period of time, so it’s worth seeking these offers.

What is a debt relief order?

A debt relief order is a way of cancelling your debts. They are an option if you’re struggling with repayments and your financial situation doesn’t improve after 12 months. When you have a debt relief order, you no longer pay back what you owe and interest and charges will stop being added. You also don’t have to engage with the lenders you owe money to.

There are risks involved with a debt relief order. While you will be debt-free, the order will be kept on a public register for 15 months and on your credit file for six years. This could make it harder for you to get credit in the future. It may also be cancelled if your finances improve or if you break the rules of the order.

Effective strategies for managing debt

Here are some debt management strategies:

Pay bills when they arrive to reduce the risk of late fees or interest costs.
Prioritise debt payments, focusing on clearing those with the highest interest rates first.
Create an overview of everything you owe so you can clearly understand the amount of debt you owe.
Create an emergency fund in a high interest savings account to cover unexpected expenses, avoiding the need to borrow in the future.
Pay what you can afford on current debts, not just the minimum payments.
Seek help with creating a repayment plan or for credit counselling when you’re struggling, rather than letting it snowball.

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