Debt is a huge part of our economy. Across the world, governments rely on debt to pay for services, banks rely on debt to make money and consumers rely on debt to buy necessary items such as houses and cars.
It’s a global cycle, a game of buying and selling debt create money. And as with any games there are winners and losers. On a large scale, successful banks are generally the winners, but on a smaller scale you can be either a winner or loser with your own personal debt.
Running up debts that you can’t afford and having repayments each month that you can’t keep up with is obviously a bad idea from the point of view of your budget. It reduces the amount of spare cash you have each month and it also costs you money because you’ll have additional charges added on for late bills or for going over your overdraft.
However long term, living like this also puts you on a losing path where debt is concerned. There are times when using credit is necessary for pretty much every normal person, and if you mis-handle your debt it impacts on your future borrowing abilities. People with a poor history of managing credit will find that they struggle to be accepted for loans or mortgages, or that if they are accepted that they are charged higher interest rates.
This traps you into a cycle where you’re paying out a lot each month to lenders at a time when you’re probably struggling to reduce your outgoings and balance your budget. You get further and further into debt and reduce your credit score further in the process, limiting your options to get credit in the future.
Winners are the people with good or excellent credit histories, who get easy acceptance for loans, credit cards and mortgages, and benefit from the lowest interest rates and APRs available. This is generally because they’ve handled their finances and debt well in the past, so lenders trust them.
Becoming a winner
If you have a less than impressive history when it comes to making repayments on your debt, you might think that you’re stuck in the cycle of bad debt. However it is possible to turn things around and improve your credit. You need to assign yourself 6 months to do this as a minimum, but it will pay you back for the rest of your life if you do it carefully.
- Get a copy of your credit report so that you understand what’s on there and what lenders judge you on. A company like Experian will be able to provide it.
- Correct any outdated information.
- Make sure all your address information is up to date with current lenders. You need all your bills pointing to your current address to make you easier to trace and look more organised.
- Register to vote, as it makes you look responsible and easier to trace.
- Write down all your debts, and include the interest rate, length of time you’ve had the debt and the monthly repayment cost. Add up the total cost.
- If the total cost is more than you earn or than you have left after living expenses, you need to speak to your lenders. Show them your income and outgoings and budget and ask to negotiate a new payment plan with lower monthly payments. Start with the ones you spend most on each month and work down the list until your bills become more manageable. You could also consider consolidating them in one loan, as you will only owe money to one place which will make things easier for you and your credit profile will look less messy.
- If you have spare cash each month, prioritise paying extra amounts on the most crucial debt. This might be one with a very high interest rate, one that is in arrears or one that you’ve had for years. If you can close off a debt completely this will show as a positive on your credit report.
- Cut out all unnecessary spending and redirect all extra money to pay off debts. This might seem difficult and not very fun, but it will only be for a few months until you have made your debts more manageable and got yourself up to date. Once you’ve improved your credit profile you’ll be able to negotiate lower interest rates and debt won’t seem so scary.