Interest rates look to be on a clear upward trend. This is very unwelcome news for people with credit-card debt. Resist any temptation to panic. There are still ways for you to beat the credit-card crunch. Here are some tips to help.
Work out whether or not you are solvent
In simple terms, you are solvent if you can afford to make at least the minimum payments on your debts and still have a decent, basic standard of living. If you are not solvent, you either have to make changes so that you are or file for insolvency.
Insolvency does not have to mean bankruptcy. It can also mean an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO). Insolvency is not the horrendous punishment it used to be. It often comes as a relief. At the same time, however, it’s still a major step with significant implications. It should therefore be a last option rather than a first.
There are, however, a couple of other options that can be useful and have fewer long-term implications. These are debt-management plans and the Debt Respite Scheme also known as the Breathing Space scheme.
You may need help from a counsellor to set up a DMP. This is not, technically, required but many organisations insist on it or at least prefer it. You will need a referral from a debt advisor to set up a breathing space. If you are interested in either of these options, it’s advisable to set the ball rolling as quickly as possible.
Check your credit rating
The basic dynamics of the credit-card market stay much the same regardless of what happens with interest rates. Lower-risk customers are charged lower rates than higher-risk customers. Your credit rating isn’t the only factor lenders consider when assessing risk. It is, however, a very important one. It’s also one over which you have some level of control.
If your credit rating is good, then leverage it to get the best possible deal on your debt. There are still zero-interest deals to be had. These are generally the best options for your debt. If they’re not available, look for other low-interest options. You might also want to look at switching your credit-card debt to a personal loan. If you are interested in this, then remember to look at niche options such as credit unions. These can offer the best deals.
If your credit rating isn’t good, then do whatever you can to improve it. At a minimum, make sure that you always make the minimum payment on your debts in full and on time. Use a credit-score checker to keep track of how it improves. Be prepared to act as soon as you are in a position to do so.
Decide how you’re going to tackle your debt
There are two basic approaches to tackling credit-card debt. One is to start with your most expensive debt. This is usually your highest-interest debt. You use all your disposable income to pay down this debt. When it is clear, you move on to the next most-expensive debt and so on. This is often known as the avalanche method.
The other is to start with the smallest debt. Again, you use all your disposable income to pay it down. Once it’s cleared, you then move on to the next-smallest debt and so on. This is often known as the snowball method.
The avalanche method can save you money on interest payments. It can, however, be very mentally challenging. You will see your balance going down each month but it may take a long time to get it to zero. The snowball method may cost a bit more. It can, however, be more motivational. You will see your wins come more quickly.
It’s therefore down to every individual to work out which method works best for them. You can try out both. Once you make a decision, however, you do need to stick to it to get the best results.
