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5 practical tips to take control of your debt

Debt problems can have a huge impact on your life. A 2008 survey by the Legal Services Research Centre found that 7 per cent of people had problems with debt and that health problems resulting from debt stress were costing the NHS in excess of £2 billion every year.

If you want to avoid ill health, worry and the impact of debt on your family and social life, it’s essential that you take control of your debt. However, getting to grips with your store cards, overdrafts, credit cards and loans can be tough. So, we’ve put together this five step guide which gives you practical tips to take control of your debt. Keep reading to learn more.

1. Work out what debts you have

In order that you can successfully come up with strategies to deal with your debts, you should first spend time working out your total accumulated borrowing. If you have a number of debts such as loans or credit cards, this might be a challenging and emotional process. Many people with debt problems believe that ignoring the debts make them easier to deal with. Ignorance is sometimes bliss.

Before you can tackle your debt problem you need to know exactly what the problem is. Work out what you owe and separate these into ‘good’ and ’bad’ debts. ‘Good’ debts are those which have been taken out to buy something which will appreciate in value. Your mortgage, a ‘buy to let’ mortgage on a property generating rent or a student loan may be considered ‘good’ debts.

Your priority should be clearing your ‘bad’ debts. These are debts which simply take money out of your bank account every month. Personal loans, overdrafts, credit cards and store cards are examples of ‘bad’ debts and should be your priority.

2. Make a plan

The first step to tackling your debt is to make a plan. By knowing how much debt you have you can start working out how much surplus income you have and how you might begin to pay it off.

Careful budgeting is a key part of this process. Work out how much disposable income you have each month and then work out how you can allocate any surplus income to your debts so can you start paying them off.

3. Pay your bills on time

Making late payments is one of the worst things you can do if you’re trying to clear your debt and improve your financial position. There are two main reasons why late payments can have such a negative impact.

Firstly, late payments to cards and loans can affect your credit rating. The BBC recently reported the case of a 24 year old that had been refused a mortgage simply due to one late store card payment two years ago.

Mortgage expert Ray Boulger says: “Even if you have a very small credit blemish on your record, something as simple as a ten pound phone bill you haven't paid, it could be enough to mean you could be rejected from a mortgage.”

So, if you pay your bills late, it’s unlikely that you will be accepted for other borrowing in future. For example, it may make it hard for you to transfer a credit card balance to a good rate.

Secondly, making late payments to loans or credit cards can result in financial penalties. If you make a late payment you will generally face a fee and you may also pay a higher interest rate. In addition, if you are on a promotional interest rate with a lender – perhaps a low credit card balance transfer rate – you will often lose your eligibility for that deal if you’re late with your payment.

Always make sure you make at least the minimum payment on time.

4. Pay more than the minimum payment

If you only make the minimum payment to your debts, you will find that it can take years to repay the debt in full. Often, you will find that your minimum payment will barely cover your monthly interest charge, meaning you are hardly paying anything off your actual debt.

If you can, try to pay more than the minimum payment on your debts each month. And, you should focus on debts with higher interest rates first and try and clear these debts before the others.

Paying more than your minimum payment will help you get out of debt much faster.

5. Consolidate your debt

If you have lots of unsecured debts, you are probably paying a high interest rate on some of these borrowings. So, consolidating your debts can be an excellent way to simplify your finances and pay off your debt more quickly.

Consolidating various high interest debts into one manageable monthly payment – often at a lower interest rate – helps you pay off your debt more quickly and reduce your total interest payments.

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