Over the last few years the UK has developed a ‘spend now, pay later’ culture thanks to the easy availability of credit. According to a recent survey the most common source of debt was credit cards with 1 in 3 people owing money to credit card companies.
Are you one of the many that now find themselves in debt? If you are not sure then it is time to find out by comparing your income with your expenditure to find out how much you overspend or save each month.
Net monthly income/expenditure
The first thing to do is to calculate your monthly (or you can do it weekly/annually) income by listing the amounts of money you receive each month, for example, salary (after tax), income support, child benefit, bank interest, dividends etc.
Next you need to identify all your monthly expenditure, such as, rent, telephone, rates, TV licence, electricity, petrol, groceries etc.
By deducting your expenditure from your income you will calculate your net income or net expenditure if your out goings exceed your income.
Once you know how much debt you are in you should list all your debts and should include bank loans, credit cards, store cards. You should also list the interest rate for each of these so you can see easily which is the most expensive and hence which needs to be reduced first.
Reducing the debt
In order to free up as much money as possible to pay off your debts you should consider:-
• obtaining a better deal on your credit card debts by transferring them to a low-interest rate card or if possible a card offering a 0% introductory period;
• using any money you have saved to reduce your debts as these savings are likely to be earning only a fraction of the interest you will be paying on your debts. For example, if you have £1,000 in savings earning 4% interest you will earn £40 a year in interest, whilst if you owe £1,000 on a credit card debt at a rate of say 15% a year you will be paying interest of £150. By using your savings to pay off your credit card debt you will save yourself £110 a year.
• consolidating your debts by taking out a personal loan at the lowest possible interest rate. It is possible to get a personal loan for under 6% which compared to paying interest on a credit card of 15% would save you a significant amount of money;
• releasing some of the equity in your home by remortgaging.
If you’re not in a position to do any of these things then it’s time to prioritise. You should try to at least meet the minimum monthly repayments and then to use any spare money to pay off your debt with the highest interest rate. Keep paying off your most expensive debt until it is paid off while making minimum payments on the others. Then pay off the next most expensive debt and so on.
You may think it is easier to pay off the smallest debts first, irrespective of the interest rate. However, you must resist this urge as it may take you longer to clear your debts unless the smallest ones happen to charge the highest interest rates.