According to a poll by money.co.uk almost two thirds (63%) of UK residents aged 16-64 have entered 2020 with some kind of personal (non-mortgage) debt. A third of those polled had debts of between £2k-£10k and nearly a fifth had debts of over 10K. On the plus side, it’s not all bad news, these results do also show that overall (just) over a third of UK adults are free of personal debt.
Credit cards are the single, biggest cause of personal debt
It may not come as a surprise to learn that credit card debt was the most common form of credit card debt with 38% of respondents stating that they were carrying a balance. Only 26% of respondents said that they paid off their balance in full each month and, more concerningly, 22% of people said that they could only make the minimum payment or less.
What is even more concerning is that 40% of respondents said that they had run up credit card debt due to normal living expenses, although 19% did say that it was due to spending on holidays and 18% put it down to making luxury purchases.
Paying off debts takes time but it is possible
A sixth of respondents believe that it will take at least seven years to pay off their debts. This may seem like a long hard slog and frankly, the bad news is that it probably will be. The good news, however, is that one way or another it is possible to free yourself from the debt trap – and it doesn’t have to be by insolvency.
It’s important to do everything you can do maintain/build a good credit score
The underlying principle of debt repayment is that you want as much of your repayment as possible to go towards paying back the capital and as little as possible to go to paying back financing charges. You should, therefore, look for any and every opportunity to reduce the amount of interest you pay on a debt and your credit score will often be key to this.
In simple terms, your credit score gives a lender an idea of how risky it is to lend to you. The better your credit score, the more you are seen as a safe option and the better deals you can score. In this context “better” means “more cost-effective” or “lower-interest”. Your credit score can have even broader implications for your debt repayment since it may impact your ability to take out contracts for services, get a new rental property (or remortgage) or even get a new job. This means that you want to do everything you can to boost your credit score.
There are basically two paths to achieving this. The first is to check your credit score periodically (say annually) to ensure that it is as complete and accurate as it can be. For example, make sure that you are on the electoral roll as this does improve your credit rating. It may only be a slight improvement, but in these situations, any little is a gain. Similarly, make sure that any mistakes are corrected. The second is to keep a track record of making repayments responsibly and that means making at least the minimum payment on each debt.
Snowball debts while you wait for refinancing options
Hopefully, you can make the minimum payments on each debt and still have a little money left over after your essential living expenses. If you do, you have a few different options for making good use of it. The first is to build up a cash cushion so that you know you have funds available for emergencies. Once this is in place, you can either use your extra funds to pay off small debts and close the account or you can put them towards paying down the highest-interest (i.e. most expensive) debt.