The Personal Debt Timebomb


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Personal debt is now a massive problem in the United Kingdom. Recent studies have revealed that almost one in five people have run up a debt of more than £10000 on credit cards, overdrafts and hire purchase agreements. That's more than 8 million people.

And even more alarming, quarter of these people owe six figure sums. That's right, more than 2 million people in the UK owe more than £100000. And that's before mortgage debt is added to the total. So if you're struggling with your debt, I've put together a selection of debt help tips that are related to the results of this latest debt study.

1) The vast majority (78%) of people who owed more than £10000, has credit card and store card debts.

Credit card debt is bad enough, but store cards debt is horrendous. In general store card interest rates are much higher than on credit cards, often twice as high.

So if you have any store card debt, it should be possible to reduce the amount of interest you pay by transferring it to an existing credit card. And if you don't have a credit card or all your credit limit has been used, look for another low rate credit card to transfer your store card debt.

As soon as you've done that, cut up your store card and never use a store card ever again. This one small change will allow you to save substantial amounts of interest and help you to repay your debts in a shorter space of time.

2) Of the people who have plastic cards, 50% have at least three cards, and in 3% of cases they have more than ten.

The first step is to increase your income and reduce your spending until you can live within your monthly income. You might want to consider shifting some of your credit card balances to a lower rate card to reduce the amount of interest that you pay.

The second stage is to cut up all of your credit cards. That will stop your debt growing. If you must have a credit card for convenience leave yourself the card with the lowest credit limit and the lowest interest rate.

Once you've done that, make yourself a promise that you will keep going until your debt is repaid. Every month that you spend less than you earn, your debt will reduce. If you can do that for long enough, you will get out of debt.

Every month, pay the minimum payment on each of your accounts and put the rest of your unused income towards repaying the card with the highest rate of interest. Once that debt disappears move your focus to the card with the next highest rate of interest. As each debt disappears you will have more money left to put towards them and the remaining debts will be repaid in a shorter period.

3) Of the people who owe money on plastic cards, 20% owe £5000-£10000, 12% owe £10000-£150000 and 21% owe more than £15000.

If your credit card debts are causing you trouble it might be worth transferring your plastic debt to a low rate personal loan and cutting up your cards. A personal loan will have a fixed interest rate and level monthly repayments which will help you to budget. It will also make you repay the debt at a uniform level, removing the temptation to make the minimum repayment some months. It might also help you to save on the amount of interest that you pay if it helps you to repay the debt over a shorter period.

4) One third of credit card debtors regularly apply for new introductory credit card offers to get lower interest rates.

It's a good idea to check rates on a regular basis to make sure that you don't pay more for your debts than you have to. But be careful that you're not doing it just to help you spend more.

5) Eighteen percent of people in the survey repay the minimum amount on their credit card debt each month

This is an extremely bad idea and should be avoided at all costs. Some months it just can't be avoided. But if you find yourself falling into this trap month after month, it's vital that you take a detailed look at your finances and take action to escape this position.

In most cases, if you repay your credit card debt at the minimum amount each month, it will take you more than 30 years to repay, and you'll end up paying more than three times the amount that you originally borrowed. [For more info take a look at ARTICLE]

6) Two thirds of the people surveyed owe more than £10000 on a personal loan.

If the size of your personal loans are causing you trouble, or you have a number of different personal loans, it might be worth considering a consolidation loan. This will gather all your personal loans into one loan to take advantage of lower interest rates. It can be unsecured or secured over property you own in order to achieve an even lower rate of interest. [For more info take a look at consol ARTICLE]

7) Of the people that owe more than £10000, 45% had an overdraft at an average level of £1850

An overdraft puts you in an extremely weak position. Between the fees and interest charges it will cost you more per £100 borrowed than just about any other form of debt (with perhaps the exception of store cards). And that's before penalty fees are taken into account if you go over your agreed limit. And if that's not enough, the bank can ask you to repay the money instantly whenever they want.

So it's best to avoid an overdraft if at all possible. Take steps to pay off this type of debt first. And if you can't do it within a month consider moving the debt to a low cost credit card and then cancel your overdraft facility. [For more info take a look at overdraft ARTICLE]

8) Expectations on how long it would take to repay the unsecured debt varied. Most people thought they would take 6 years to repay it, while 13% expected it to take 10 years.

Aim to pay your debt off as quickly as possible (to reduce the amount of interest paid), but keep your expectations realistic. If you expect to be debt free within six months and you don't meet that target, it will cause great disappointment and dejection. It will also make it harder for you to keep chipping away at your debt.

So work out an achieveable period to repay your debts and keep going. As long as you spend less than your income each month, the size of your debt will keep shrinking.

by Stuart Laing

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