If you’re carrying debts, particularly high-interest debts, you should try to make it a priority to reduce them. Ideally, you should eliminate them, at least the high-interest debts. This may be particularly important in 2023 as interest rates may trend upwards. Here are some tips to help.
Set out what you actually owe
Go through all your financial paperwork and figure out what you owe to whom. Make a note of the terms.
Calculate if you are currently solvent
You are solvent if you can make the minimum payment on your debts and maintain a basic standard of living. If you realistically cannot do this, you are insolvent. If you are insolvent, you need to get professional help immediately. You may be able to get this help for free from a charity.
Remember, being insolvent does not necessarily mean that you have to file for insolvency. You may be able to negotiate with your creditors to avoid this. A debt counsellor may be able to help with this process. Even if you do need to declare insolvency, that doesn’t necessarily mean bankruptcy. If it does, it’s still not the end of the world.
Consider if you would benefit from a breathing space
The Debt Respite Scheme is exactly what the name suggests. It’s a scheme that essentially allows people to freeze their debts for a short time. This includes freezing any creditor action. The person then uses this breathing space to work on a path forward with the help of a debt counsellor.
There are two versions of the Debt Respite Scheme. These are standard and mental health. Both versions of the scheme have their own qualifying criteria. It may be worth investigating both options to see which one is right for you.
Look at your options for restructuring your debt
If you have lots of small debts, you might want to look at consolidating at least some of them. You might want to leave the very smallest debts where they are. If you think you can pay them off fairly quickly, it may not be worth moving them.
If you have fewer, larger, debts, check if you’re using the best product for them. If you’re not, then move them if you possibly can. If you can’t qualify for anything better right now, make a commitment to move your debts as soon as you can.
Choose your approach to reducing your debt
There are only two approaches to reducing debt. The snowball approach clears debts in order of size. It starts with the smallest debt. The avalanche approach clears debts in order of cost (i.e. interest expense). It starts with the most expensive debt. Neither approach is right nor wrong. It’s about what works for you.
Develop your budgeting skills
At a basic level, your budget is to ensure that your money lasts as long as you need it to. At a more advanced level, your budget makes the best use of your funds. When you’re dealing with debt, you want to put as much money as possible towards your debts. This is probably going to require you to make savings elsewhere. Your budget can help with this.
Pick a category a month and really look closely at what you spend in it. Then look for ways to reduce your spending. This may involve some advance planning. For example, you may see that you are spending a lot of money on energy. If so, make a note to review your tariff as soon as you can. In the meantime, try implementing other energy-saving measures.
Close lines of credit as you clear them
As soon as you clear a debt, make sure you formally close it. There are two reasons why this matters. Firstly, this will clear the line of credit from your credit record. Secondly, it will remove a source of temptation.
