At some point most people will experience some form of debt. Whether it is credit card related, a simple overdraft or even a mortgage: it’s almost impossible to live entirely debt free. Just by furthering your education and going to university, you incur debt by way of student loans. However, not all debt is bad debt and there are several ways you can tackle your debt at any stage of your life.
Debt is defined as an amount of money that is owed or due to be repaid. Unfortunately, the word has accumulated a bad reputation over time, with most referring to debt as a negative situation or something you just can’t get out of. But that is not always the case and it’s not a true reflection of most people’s financial situation.
Just because you are in debt or you owe a creditor money, it doesn’t mean you are unable to manage your finances. You could have a very healthy relationship with your monetary affairs and still end up taking out a loan just by taking out a mortgage. Yet, if you explain you have a mortgage, most people will congratulate you because it signifies the milestone of buying a home and it actually shows you have a good grip on your financial situation. This is why it’s important to know the difference between good debt and bad debt.
It might sound strange, but different types of credit will paint different pictures about your financial circumstances. Good debt is like an investment; something that will return more benefits in the future than disadvantages.
For example, obtaining a student loan when you go to university can be seen as a form of good debt because it’s a financial investment in your future that usually results in you getting paid a higher salary as a graduate, compared to a non-graduate. While it’s still a debt that you need to pay off, you only start repaying it once you earn over a certain annual salary so you won’t be lumbered with repayments if you can’t yet afford them. Another example of good debt is a mortgage because once you have paid off your mortgage, you become the owner of your house which is a large financial asset. As houses usually grow in value over time, the resale value will hopefully be higher than the original amount you bought it for – which is ultimately the idea of a financial investment.
Unfortunately, there is such a thing as bad debt. Bad debt is not an investment and usually costs you more to obtain than it will ever return in the form of money. Things like a luxury holiday that you can’t afford or borrowing money to repay other loans are examples of bad debt. Although you will enjoy the holiday while it lasts, it’s not a sensible investment because the repayments may leave you financially unstable and cause you further problems in future.
You should never borrow money to repay another borrowing as your debt will just increase due to interest rates and charges. Instead, if you start finding your debt is becoming a little unmanageable, it’s better to turn and face it head on rather than running away. Whether it’s a £150 overdraft or a few thousand pounds across different lenders, there is always a way to turn your financial frown upside down.
You can find out more information on good debt versus bad debt here.
While it has ‘bad’ in the title, bad debt doesn’t have to be a bad thing. However, you should try to ensure you are making every effort to meet your repayments on time and try not to obtain more credit until you have repaid any currently outstanding balances.
Student loan payments come straight out of your salary, so you won’t need to worry about making this repayment on time. However, priority bills will rely on direct debits or manual transfers so it’s important that you have the funds available to meet these commitments. Priority bills include your rent/mortgage payments, utility bills and essential expenditure like grocery shopping. Not making your priority bill payments on time or in full can leave you in arrears, and in a worst case scenario: without a home. Always prioritise your priority expenditure, but don’t forget about your other loans and running account responsibilities.
If you find you have taken out more loans than you can currently afford to repay with your disposable income, don’t take further credit in order to meet your repayments on time. This will usually only increase the amount you owe. Instead, talk to your creditors. They will want to help you repay any debts in an affordable way and will gladly work with you to arrange a suitable repayment option. Even if it’s just a short term cashflow issue, get in touch and see if there’s anything they can do to help relieve the financial pressure. Making manageable repayments is more likely to help you repay your debt – both good and bad – in a sustainable way.
If you have a few creditors and you’re struggling to keep track of how much you owe each creditor, it might be worth getting in touch with a free debt advice service. There are several charities who will help you arrange a debt management option which best suits your financial circumstances. Be mindful that commercial debt management providers will charge a fee for their services so it might take you longer to repay your debt in full. Debt management is normally very discrete, so no-one even has to know you’re seeking help. And remember, getting financial advice is a good thing that’s nothing to be ashamed of.
While it takes years to pay off a mortgage, there’s no reason you can’t celebrate paying off your other debts. Mortgage and rent payments are part of your monthly priority expenditure, however once you’ve repaid any ‘bad debt’ or even your student loan, it might be worth thinking about preventative measures against future indebtedness.
Making regular payments into a savings account is always sensible. Once you are completely debt free or even if you are still making regular payments towards your current borrowings, you can still save any spare cash here and there. Then, in future when a bill pops out the blue or it’s time to replace the family car, you might have just saved up enough to avoid taking out a loan to cover the costs – or at least, you might have saved enough to put down a healthy deposit and reduce the total amount of interest payable on car finance.
Paying off debt is one of the most rewarding feelings, but if you’re not quite there yet, it’s nothing to be embarrassed by or ashamed off. Most people have some kind of credit commitment and you’re never alone even if you are struggling a little. Saving money is probably going to be your best protection against debt in the future, but you should still enjoy living in the present. As long as you are making sensible financial choices and saving where you can, there’s no reason you can’t still enjoy life and spending money on little luxuries here and there.
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