People can argue the toss about whether there’s ever any such thing as “good debt”. Some people say that debt which allows you to buy an asset you would otherwise have been unable to afford is “good debt”. Others says that if you can’t afford it you shouldn’t buy it. If you’re in debt, however, this debate is largely philosophical. The immediate, practical, consideration is to get your debt under control and going down, so that you avoid bankruptcy. Here are five tips to help you achieve this.
Get on top of your current financial situation right now
People say that in a crisis, the standard responses are fight or flight, well in reality, there’s actually a third one – freeze and it’s actually a fairly common one where debt is concerned, hence the comment about those in debt “sticking their heads in the sand”. Get your head out, get your financial paperwork together and get on top of exactly what money you have coming in and where it is going. That includes looking at all those little transactions on your bank statement (like the contactless ones) because they can really add up.
Analyse how much of your income is going on genuinely essential expenses
Essential expenses keep you out of prison (taxes), keep a roof over your head, keep you clothed and fed, let you get to work and allow you to communicate with your loved ones. If you have a pet, then pet insurance can be classed as an essential expense, in fact it probably should be since you’re highly unlikely to be in a position to deal with an expensive vet’s bill if you’re in debt. If you have enough money to pay for these essential expenses and make at least the minimum payments on your debts, then you have enough money to avoid bankruptcy. If you don’t then you either need to get help from someone close to you or look seriously at the option of bankruptcy.
Keep your cash in hand well away from your debts
Add the phrase “setting off” to your vocabulary. It means that banks can take money from accounts in credit to pay off debts. Legally this is a really complex area, but in practical terms it can be made very simple. If you owe a bank money, keep your current account and savings with a completely different organisation. The only complication here is making sure that the other organisation is completely unrelated to your creditor rather than two separate brands owned by the same parent (like RBS and NatWest).
Pay your essential expenses as soon as you get paid
There’s a lot to be said for the “set and forget” nature of direct debits, but only if you’re sure you’ll have money in the bank to cover them when they hit. If you’re struggling to manage your money then try looking into cancelling direct debits and paying essential expenses manually on the same day you get paid. Then you have to manage on what’s left.
Work to maintain/improve your credit record
Illogical as it may appear, you may be struggling with debt and yet have a pristine credit record because you’ve always made at least the minimum payments in full and on time. If this is the case then keep up the good work and look around to see if there are any opportunities for you to refinance at a lower rate. If your credit record has taken a battering then make it a priority to put matters right and while this will probably just be a matter of time and financial good behaviour, you could always try double-checking your credit record for any mistakes or missing information.