Managing your Money

Everything you need to know

What is a credit score

Where to seek advice if you’re in debt

Debt is a sum of money borrowed by one individual or party from another. Many individuals and organisations use this to make a larger payment that they could not afford to pay outright or in one go. Debt arrangements differ depending on the circumstance and contract, but the condition is generally that the money will be paid back later – often in instalments.

The price of this loan is usually the interest that you accrue, meaning that in a trade for being loaned money, you will pay it back at a higher rate. Often, this can result in people lending money that - for whatever reason; a change in circumstances or otherwise – they are then unable to pay back..

We spoke to finance experts Becky Goddard-Hill, Richard Fenton and Pauline Paquin to get their advice on how to avoid debt, and what to do if you’re already in debt.

Becky is an author and multi-award winning blogger, who runs the money-advise site, Family Budgeting. Richard is a finance expert and media writer, and runs the UK Top 10 Business & Finance blog, Doesn’t Grow On Trees. Last but certainly not least, Pauline is the writer behind Reach Financial Independence, featured on the likes of The Huffington Post, Business Insider, Forbes and Mint.

Avoiding debt

For those that are considering taking out credit for the first time and want to avoid getting into a difficult situation with debt, here are a few things that you can do:

Only borrow what you absolutely need
It can be tempting to take out a loan to purchase what you want at a moment’s notice, particularly when you don’t need to think about the consequences till later down the line. However, we would always recommend buying what is required, rather than something that you simply want.“Only borrow what you need”. Richard warns us, and remember: “Credit is NOT free money.” Budget for your payments and make sure you will be able to repay.

Get a handle on your finances through forward planning,
“It’s important to make sure you plan a budget to ensure you can easily make your repayments on time every time.”
By budgeting for how much you will need to pay back each time, you can work out whether the credit loan is affordable and avoid any late or missed payments that could put you at risk. You can find out more about how late and missed payments can affect your credit score here. Richard goes on to remind us,

“Remember to also factor in the interest you will be paying back to ensure that you are getting a decent deal on the credit you are taking out.”

Have some savings in reserve
It’s a good idea to have some savings in a backup fund – for a change in circumstances, a surprise payment, or just so as it’s there. If you put away a small amount regularly, even as little as £10, this could help you build up an emergency fund. Pauline uses Christmas as an example,
“Try to save ahead. Christmas comes back every year. Saving £10 a week means you can have £500 for presents by the end of the year.”

Getting debt advice and debt help

If you’re struggling with debt, it’s always best to speak to someone about it. As Richard recommends,
“Anyone can get into trouble, but always contact your lender first as they are geared up to help you, and you may be surprised at just how understanding they are.”

And as Becky points out, even if they can’t help,
“they will likely signpost you to the best agencies for free help and advice.”

You should also consider talking things through with an experienced debt adviser.
There is often an alternative route that you can take to get your finances back on track, and a debt adviser will be able to guide you through many debt solutions that you may not have considered. These are free and can help you choose the right path for you, considering your circumstances without judgement and entirely confidentially.
As Richard says, “The most important thing is just to seek advice before it’s too late.“

There are some great organisations who can help you with debt management who won’t charge you for doing so. Step Change are among the best – they can advise you on the best route to take, which could be a simple repayment plan to your creditors or bankruptcy.

Pauline recommends speaking to a local debt charity and suggests that The National Debtline and Citizen’s Advice Bureau are good places to start for debt management help. “They will assess the severity of the situation and make sure you understand all of your options, the effect on your credit score, your responsibilities and ability to get credit down the road. Bankruptcy, for example, stays on your report for seven years, so it should really be a last resort option.”

If you want an alternative to speaking to a counsellor, Becky suggests getting yourself well informed about all things to do with debt on websites such as www.moneysavingexpert.com: “It’s so useful; money is a critical part of our life and learning how to manage it well is a really important thing to be educated about.”

She suggests that just like their counselling service, www.nationaldebtline.org also provides free resources such as debt help plans and advice via web chat, on the phone and online from experts in the field.

More debt help from the experts

Severe debt and bankruptcy are a very serious and stressful position to be in. Like losing a lot of weight, it will take time and a lot of effort to go back to financial stability, says Pauline.

Becky suggests an excellent way to manage this stress:
Firstly, try and have a growth mindset about your issues. Despondency is a natural feeling about debt, but it can cause inaction and a tendency towards bad habits such as overspending/over-indulging in an attempt to make yourself feel better. None of this is helpful.

“The important thing is to be solution-focused and positive. You absolutely can sort this out and make it better. Particularly for serious debt problems, getting the right support is vital, and I would suggest step-by-step support and a thorough examination of options as it will require a longer sustained process and not a quick fix approach.”

How to avoid more debt? “The first step is to reduce spending so you don’t get into any more debt and can repay larger amounts and reduce interest payments. There are so many simple ways to do this from using comparison sites to get all the best possible deals on everything, from insurance to utilities, using voucher codes, meal planning and switching supermarkets, to house swapping with friends rather than splurging on holidays. There are so many creative ways to reduce spending – so see it as a challenge!”

Falling into debt is a stressful situation for anyone, but it’s important to remember that there is always a way out. Always be pro-active in your approach to debt rather than assuming it will go away on its own and speak to someone that will help you find a solution that works for you!