Let’s Talk about Debt

Wouldn’t it be great if there was no need for debt? A world where we were all able to afford things straight off and there was no need for credit. For most of us, it will be impossible to go through life without some level of debt. Imagine if we all had to save up for the full value of a house before we could buy a property. We’d be lucky to get on the property ladder by the time we retire!

What’s the difference between good debt and bad debt?

You will often hear debt categorised as either good debt or bad debt. A good debt is something that has been very carefully thought about. It’s a debt that is affordable now, has a low rate of interest and looks to enhance your finances for the future. A student loan and a mortgage are both examples of good debt.

On the other hand, bad debt is often a debt that’s been entered into rashly, with little thought, that is not affordable, has very high interest and is very hard to get out of. Examples of bad debt could be payday loan or unaffordable credit card debt.

Dealing with debt

If you’re debts are starting to pile up, then it’s much better to educate yourself on how to tackle it head on rather than ignore the debt while it continues to mount up. Here are some popular methods of tackling debt:

Avalanche vs Snowball

The Snowball and Avalanche methods of dealing with debt are very popular among the debt community.

With the Avalanche method, you list all debts, starting with the one you pay the highest amount of interest on. You pay the minimum amount on everything but any extra money you have goes towards making overpayments on the highest interest debt.

Financially, it makes sense to clear the debt that is costing you the most in interest. Once the highest interest debt is paid you move onto the next debt on your list and keep on going. Adopting this approach can save hundreds, if not thousands, of pounds over the life of your debt.

However, the Snowball method is slightly different in that you list all your debts starting with the smallest. You pay the minimum amount on all your debts and concentrate on making over payment to the smallest debt. Although this method doesn’t make as much financial sense it works at keeping people motivated to keep reducing their debt.

The thrill of paying off a credit card and fully getting rid of one whole debt is a real boost to people. Clearing debt takes time and commitment, anything that boosts your morale and keep you on the debt free journey is a useful tool.

Balance Transfer vs Debt Consolidation

Debt can be a vicious cycle that can be very hard to get out of. The main reason for this is the interest that is charged on borrowing. If you are only making minimum payments a large amount of what you’re paying off monthly will be taken in interest. This not only extends the length of the debt but also the amount you pay off over the length of the debt.

Many banks offer Balance Transfers, this is where you can transfer your credit card debt from one interest charging card to another card, that might be 0% interest or lower than your current card. In principle, this sounds great, but you must do your calculations first. The banks will often charge a set percentage to carry out the transfer. In effect, this adds to your debt. If you have a small amount of debt to transfer then it might not make sense to do this. Also, the 0% period will only run for a set period. Try to clear the debt before the period ends as you’ll start paying interest.

Like balance transfers, debt consolidation can be great when used in the right way but they aren’t for everyone. Debt consolidation is where you consolidate all your debts into one payment, find out more here. In effect, you’re taking out a loan to repay all your current debts. This is great if you only want one monthly payment going out each month. The interest on the loan might be cheaper than the interest rates you are currently paying. This reduces the amount you’ll repay over the life of the debt. But you mustn’t fall into the trap of running up your credit cards again. When you still have easy access to credit, it’s easy for the debt to start to creep up again.

If you are struggling with debt then there is help out there so don’t suffer in silence. In the UK contact the debt charity, StepChange.org for free help, information and support.