Unmanageable debt can be scary, and it’s something that can happen to anyone. However, it’s not to say that borrowing money is always a bad thing, and in many cases it can be hugely beneficial. The key is to do it sensibly, so if you’re thinking of taking out a loan, credit card or any other kind of debt then here’s what you need to know.
Know the difference between ‘good debt’ and ‘bad debt’
First things first, it helps to know whether it’s worth getting in the red in the first place. And there really is a difference between good and bad debt. Good debt is an investment that will grow in value or generate long term income- for example, taking out money to pay for education is expensive, but in the long run it could score you a better job with more money. Purchasing a home, again a massive expense upfront for a deposit and fees, but it’s something that will accumulate in value. Borrowing money to start a business could be considered good debt. Taking out money to buy luxuries that you can’t afford right now are a bad way to get into debt, so holidays, clothes, technology. It’s not to say you can use credit cards or loans to buy these things in moderation if you really need them, but start getting spendy and you’ll end up with a huge amount of interest for items that will probably be worthless in a year or two. Purchasing a car using credit is a bit of a grey area. If you don’t have a vehicle and a car would enable you to get a better job further out for example then it could be considered good debt. Maybe your current car is unreliable and expensive, and upgrading will save you money on insurance, tax and repairs.
Shop around to get the best rates
Interest rates and deals vary wildly from company to company. To make sure you’re getting the best deal for you, it’s important to shop around. Use price comparison sites to see interest rates, and get clued up on different forms of credit and how they work. For example, what balance transfer cards and consolidation loans are, and what an offset home loan is. When you’re educated on what these kinds of things are, you can make better decisions and go into things with your eyes wide open. The last thing you want to do is take out a debt and realise later on that it’s not affordable to keep on top of. It’s how you fall behind and start \racking up more interest and fees. This can eventually lead to bailiff visits, county court judgements and in the case of car or home loans, you can have the asset recovered from you.
Improve your credit score
If you’re applying for loans or credit cards and finding that you’re only being offered very high interest rates (or being rejected altogether) then it’s worth regrouping and spending some time working on your credit score. Use a website to access your credit report and see what’s causing issues. In some cases, there might be mistakes that can be rectified. It might be that you’ve never had any credit before, and so need to spend time building up your score. If you’ve had credit in the past and not managed it well then this could be harming your score, unfortunately it can take six years for this to fully ‘drop off’ your report. In the mean time, make sure you’re not missing any more payments and that your finances are all in order. If you want to borrow money for a mortgage for example, it might take a while to repair your score as time is the best way to go about it. The more historic the defaults and CCJs are the less impact they’ll have on your report, but you’ll probably find that you never get the best rates until they’re gone and you’ve improved your score with positive influences.
Rejig your budget
If you find a credit deal that’s right for you and are happy to accept it, take a look at the repayment terms and adjust your budget accordingly. Set up a direct debit to cover the payment each month, or in the case of a credit card you can set up an order with the bank where the full amount is taken each month. This enables you to spend on your card but ensures it’s paid off once you get your wages and as you never carry a balance you don’t pay any interest. This is useful if you’re taking out a card purely to rebuild your credit. As you’ll need to be spending on it each month, but you don’t want to be paying interest. Paying in full keeps you in control of your debt, it prevents it from spiralling.
Turn off automatic credit limit increases
Speaking about spiralling, one way that debt can really get out of control is when lenders automatically increase your credit limit. Having access to a large amount of funds can be really tempting for some people, and if you think there’s a chance that you might end up spending or going on a shopping spree then it’s crucial that you turn this feature off. If there’s no otpion to do so, call your creditor and ask them to reduce your limit to something you’re comfortable with and request that they don’t increase it again, they’ll be more than happy to do this. Having lots of available credit can actually reduce your credit score if this is something you’re trying to improve, since creditors know that people can easily fall into financial trouble and then stop paying them back if their borrower can quickly access a large amount of funds.
What tips would you give people when it comes to borrowing money sensibly?
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