How to Reduce Debt
Many of us rely on debt every day in ways that we probably don’t realise. From interest free credit cards, to buy now pay later deals and car finance, the UK is now a country which is over reliant on debt to fund everyday spending.
This isn’t a problem as long as the debt repayments are manageable and interest rates are low enough that you can pay the debt back in a reasonable timeframe. But it is very easy for debt to build up without you realising or stopping to think whether your borrowing is still affordable to you.
If you are starting to feel the squeeze then it is probably time to start thinking about how to reduce your debt before it becomes a problem.
How can I reduce my debt?
There are many debt solutions which can help when debt repayments have got to a point where they are unmanageable. Tell-tale signs that debt is unmanageable include borrowing more to meet debt payments, struggling to meet essential bills and living costs, constant worrying and anxiety about money or feeling like you can’t open bills or face up to the full extent of your borrowing.
If this describes how you feel, it’s time to start looking for a debt solution. But if you can reduce your debt before it becomes a problem then you will likely never need a debt solution – and you will save a lot of wasted money on interest and fees.
Below, we’ve outlined a few key tips to help you reduce your debt:
Stop, or at least reduce, your spending
This is the best way to start reducing debt, but likely the hardest. If you are borrowing to cover non-essential purchases, try to change your habits and practice mindful spending.
We all know that the instant gratification of a purchase on your credit card or a buy now, pay later deal can be hard to resist but ask whether you really need to splash out at this stage. Can the purchase wait? Is this something you really need? Would you buy it if you had to pay cash? If social media is one of your spending triggers, consider closing your account or at least limiting your time on Instagram and Facebook.
Get into the habit of saving
Rather than relying on credit for big purchases, why not put a bit of money aside on a regular basis. Saving can often feel like an impossible task, but give it a go – you have nothing to lose.
Save what little you can, where you can, and you will be surprised at how far you get (and how good it feels to have even a small pot of money). This is also by far the cheapest option in the long run. Not only will you save the interest on a loan, but you will earn interest on your saving pot. This is also good practice which you can use to get into the habit of making regular payments to reduce your debt.
Stop taking out new debt
Make this a rule and stick to it. Try and stay off credit reporting and money comparison sites which will tempt you with new credit cards and loans. Only spend what you have and what you can afford (and don’t touch those savings unless you really have to).
If you can’t afford one of your bills, speak to the company, explain the situation to them and when you expect to be able to pay. You will be surprised by how helpful they are. Don’t be tempted by payday loans or credit cards, you will only need to borrow more next month when the interest and fees become due.
Check you are not paying over the odds for your utilities
Switching providers could save you as much as £100 each month. Look for companies who offer great rates for combined utility accounts. There are some great deals to be had at the moment and it takes just minutes to switch online. And while you’re at it, why not go through your bank statement and cancel memberships or subscriptions you don’t need anymore? Make sure you use the money you save to reduce your debt by paying off credit cards and loans.
Reduce interest rates on current borrowing
There are a number of ways you can do this. The best place to start is by speaking with your lender. There may be a deal they can offer you or an option to waive interest charges for a short period.
How to stop interest on debt
Often, it is the interest that builds up on borrowing which makes debt unmanageable and payments unaffordable. Unfortunately, the more you borrow, and the more debt becomes a problem, the less chance you have of being offered credit at a good rate. This is how problems start.
A consolidation loan or zero per cent balance transfer card is often the first thing that people think of when trying to stop interest on debt. If you have already tried this, you will realise that it is very difficult to secure borrowing at a lower rate once you have multiple debts or lots of outstanding accounts.
Being turned down for a consolidation loan is incredibly frustrating and difficult to understand. You may feel that all you need is this one small break and that if the interest is reduced, even just for a short time, you would be okay again. But in reality, failing to secure a consolidation loan should be thought of as dodging a bullet.
Borrowing to get out of debt rarely (if ever) works. It is too tempting to keep that credit card which you have just paid off – if only for a rainy day, or to use the loan for some other purchase which you will pay back next month or next week. Taking on more credit is often the start of an inescapable cycle of debt. The truth is that your application for a consolidation loan or credit card has been rejected because you are very unlikely to ever pay this back.
You may feel like you are an exception to that rule, but you’re probably not. Lenders are run by huge datasets and very clever computer programs which analyse consumer behaviours, including earnings, spending and borrowing, to work out how likely it is that you will pay this money back. The less likely you are to pay it back, the higher the interest rate will be. If you are only being offered high interest rates, it is because debt is, or soon will be, a problem for you.
Talk to your lender
The good news is that there are other, better options for stopping, or at least reducing interest on debt, including talking to your lender and changing the way that you use credit.
Many lenders will reduce or freeze interest, or even waive it for a period, if you tell them that you are in financial difficulty. This is because the FCA requires all lenders to practice what it calls “forbearance” when dealing with customers who are struggling with debt payments.
This includes suspending, reducing, waiving or cancelling any further interest where you are in arrears. Even if you are not behind on payments, it is worth speaking to your lender to ask whether they will stop the interest on your debt, particularly where the interest payments are likely to put you in a position where you cannot afford debt repayments or priority bills. Your lender may even allow you an interest-free period to give you an opportunity to reduce the overall debt.
If you make it clear that you are reliant on credit then a reasonable lender will take steps to give you a reasonable opportunity to repay the debt. Where you feel that your lender has not taken your circumstances into account or has treated you unfairly, you may want to consider making a complaint to the company.
Change the way you use credit
Rather than leaving a credit card with a big balance and paying only the minimum amount each month, why not pay off as much as you can and use the credit card for your essential spending such as petrol or food shopping?
You will only be charged interest on the balance that you do not pay off and you will not be charged interest on any new spending. This means that if you pay off the statement balance of your card each month, you will not pay any interest.
Many store affiliated credit cards will also give you points based on your spending, which translate into discounts or vouchers to spend in store. If you regularly shop at one supermarket or fill up at one fuel station, this makes a credit card a great option for everyday spending – as long as you can afford to pay the statement balance each month.
Make payments on time
Finally, one of the surest ways to reduce the interest and charges which add to your debt is to make all of the agreed payments in full and on time each month. If you know that you are going to struggle to make a payment, speak to the lender before you miss it. Where this isn’t possible, speak to the company as soon as possible after the payment has been missed or is late. Often, banks and credit card and loan companies can waive charges and interest when you speak with them.
If you’re worried about debt and how much you are paying back each month, it may be time to look for a longer-term debt solution to reduce what you owe or even escape debt entirely. Galahad & Co. are experts in consumer credit law – why not get in touch with our friendly team today to start exploring your options.