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How to manage debt and not let it manage you

Britain is a nation of borrowers. Millions of households now have personal debt, with Credit Action reporting that outstanding personal debt in the UK stood at £1.460 trillion at the end of May 2012. The average British adult has a debt of £29,722 and the average British household pays £2,399 a year in interest repayments.

For many people, debt is now the exception rather than the norm. A recent survey from a financial services website found that 6 per cent of adults believe that debt will always be a part of their life. However, it is possible to proactively manage your debt and to keep in control of your finances. You don’t have to let debt your spiral out of control and you don’t have to let debt take over your life.

If you want to know how you can manage your debt without it taking over your life, keep reading.

The UK: A nation of borrowers

Over the last two decades, more and more people have taken on debt. The increase in the choice of mortgages, store cards, personal loans, credit cards, overdrafts and payday loans available means that UK borrowers now owe more than the total output of the country in a year.

You may have a mortgage, some small credit card debts or you may owe money on a range of products to a range of creditors. What is important is not so much the amount of debt you have, but whether you can manage it proactively and sensibly. If you have a payment plan for your debt and you can comfortably meet your payments then you are probably managing your debt well.

However, if you are struggling to pay your debts every month or you are missing payments, then your debt is starting to manage you. And, this is not just a problem for younger people. Research conducted by TNS on behalf of Age UK in 2012 found that the number of older people owing money rose sharply over the previous twelve months. And, nearly one fifth (19 per cent) of those in debt were concerned about the amount of money they owe.

Our guide looks at how you manage debt responsibly so it doesn’t become a problem.

Good debts v bad debts

While you would probably love to be debt free, some debts can be necessary. For example, you are unlikely to be able to afford your own home without the help of a mortgage and many students couldn’t pay for their university education without a student loan.

If you’re thinking about taking on debt, it is important that you understand the difference between ‘good debt’ and ‘bad debt’.

Good debts can actually help you. They are debts that you use to further your life or help you to own an asset. Two of the most common types of debts that are considered to be ‘good debts’ are student loans and mortgages. A mortgage allows you to buy a home - an asset which you own and could increase in value. A student loan allows you to obtain a good education, increasing your prospects and income earning potential for the rest of your life.

Good debts help you to gain something, and repaying the money can benefit you.

Conversely, bad debts are debts that are accumulated to gain items that are not going to increase in value. For example, buying holidays, gadgets, clothing or food with a credit card is considered ‘bad debt’ as you will have nothing to show for the debt in a few months. Yet, you will still be repaying this debt in several months or, sometimes, years.

If you’re trying to manage your debt, it is important to keep your bad debts to a minimum as they are where most problems arise.

Maintaining your debts at a comfortable level

To manage your debt, you need to keep your debts at an affordable level. Always make sure you can make your payments in full and on time and that you have a plan for clearing what you owe.

Working out a household budget can be a useful way of keeping your debts under control. Total up your income and all your outgoings and work out how much disposable income you have every month. Make sure your debt repayments don’t push you over the edge into a position where you don’t have enough money for your essentials.

Keeping a spending diary can also help you to monitor your income and outgoings. This will allow you to keep track of what your outgoings are and will help you to notice if your debt is suddenly increasing.

Paying your debts off

Many people believe they are managing their debt by making their minimum payments on time every month. However, if you really want to be in control of your debt, you have to have a plan for how you intend to repay it.

Baines and Ernst reported in 2011 that over a fifth (22 per cent) of credit card users kept a balance on their card all year round. While these people may be paying their minimum payments, they are not managing their debt if they don’t have a plan to repay it.

There are lots of ways that you can start repaying your debts:

  • Working extra hours or taking a second job and using this cash
  • Selling unwanted items to raise money
  • Cashing in savings or investments to pay these off your debts (see also the next section)
  • Claiming any Government benefit to which you are entitled
  • Paying more than the minimum payment every month

Research from a leading financial website found that, over the last year, more than a third (35 per cent) of Brits reduced the amount of debt that they have. This proves that it is possible to repay what you owe if you make plans and take steps to manage your debt.

Tim Moss, head of loans and debt at, commented: "It's encouraging to see consumers showing prudence and looking to pay down their debt.”

Balancing savings and borrowings

If you have savings, you may be keen to maintain these. Many people like to keep an ‘emergency fund’ available should the worst happen and they need some cash in an emergency.

However, if you want to be successful in managing your debts, it may be prudent to actually use your savings to pay off some of your borrowings. With savings rates being as low as 3-4 per cent with many banks and building societies, you are likely to be paying much higher rates of interest on your debt than you are earning on your savings.

The Daily Telegraph reported in March 2012 that the average UK overdraft record was 19.5 per cent while the average interest rate being charged on credit cards was 17.3 per cent. So, if you have a £500 overdraft on which you are paying 19.5 per cent, why not pay it off with the £500 savings you have earning 3 per cent?

What to do if your debt problems get out of control

Even if you have carefully managed your debts, they can get out of control. An unexpected expense or a change in your employment status may leave you struggling with your repayments.

In this case it may be wise to seek professional advice to explore your options. For example, a debt consolidation loan may help you to repay all your creditors and leave you with a much more affordable monthly payment. Or, a formal debt management solution may be needed if you have no other option.

Organisations such as the Citizens Advice Bureau and the Consumer Credit Counselling Service (CCCS) can provide free, impartial debt advice.

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