This is poppycock. The only real division that matters is between those debts that you control and those that control you.
Our research shows that more than one in four people often worry about how much debt they have, and 8 per cent worry about it every day. In Yorkshire people are more on top of their borrowing than elsewhere in the country, but still 23 per cent often worry about how much debt they’re carrying and 7 per cent worry every day – only 42 per cent of people in Yorkshire say they never have to worry about debt.
This is why when we talk about financial resilience, the first step is to take control of your debts.
Ideally this should start before you borrow a penny, with the question ‘do you really need this?’ Don’t confuse this question with ‘is there any way you can convince yourself it’s OK to buy this?’ because the answer to that is always ‘yes’.
You need to be strict: if you don’t have emergency savings and the clutch has gone on the car, it meets the criteria, but even if your kids are driving you round the bend pestering you for a technology upgrade, it doesn’t count.
If you really do need to borrow, or you’ve already made the purchase and taken on debts, there are five more questions:
What’s the interest rate?
What are the repayments?
Can you afford all your debts?
Is it a stretch?
What’s your plan for paying them off in full?
If you’re paying a rock bottom rate, you can afford repayments, you’re on top of your overall borrowing, you have a sensible plan to pay it off, and you know what you would do if your circumstances or the interest rate changed, then you’re in control. That doesn’t mean you can give yourself permission to go on a borrowing spree, but at the moment, your debts aren’t anything to keep you up at night.
However, if you’re paying a higher rate of interest, the repayments are a stretch, you have several loans and credit cards you’re struggling to keep on top of, or you’re paying the minimums with no real idea of when you’ll be able to pay it back, then your debts are at least starting to control you.
The real risk is that this becomes a spiral, because the more you borrow, the more you’ll need to repay each month, and the more of your income is eaten up on payday before you even start living. This means you’re more likely to have to borrow more or miss payments, which means more debt, and so on.
But you don’t need to have the wrong answer to all of these questions, or be in a debt spiral, in order to have debt issues that need addressing. Even if you’re just repaying the minimum on your debts each month, or struggling to meet your repayments, you need to take action.
The first task is to pay down high interest and short-term borrowing. This doesn’t include long-term debts, like mortgages, but covers everything from payday loans to credit cards and overdrafts. In some cases, you can tackle this by drawing up a budget, freeing up cash by cutting costs elsewhere, and using this to repay your debts.
You need to start with a list of everything you earn in a month and everything you spend – including all your bills and a share of big annual costs like Christmas and holidays. You then need to tinker with the spending figures to balance the budget and free up some spare cash to save each month.
The easiest way to do this is by shopping around for your bills and cutting out regular spending you get very little out of. You should also see if you can switch any of your borrowing somewhere cheaper, because the less you’re paying in interest, the more you can afford to repay. If you’ve already done these things and you need to free up more cash, you may need to consider bigger lifestyle changes.
The money you free up should be used to ensure all minimum repayments are made and then repay the highest interest debts first. That way you’re wasting less on paying interest and can put more into repayments as time goes on.
If you’ve squeezed the budget as hard as humanly possible and you still can’t find a way to get on top of your debts, then you don’t need to face this alone, because debt charities like Stepchange can help.
Their experts will talk you through your options, and check you’re getting all the help you can from the state. They will also be able to deal with companies you owe money to if you need to make any alternative repayment arrangements.
Once you’ve tackled your borrowing, the key is to make this a one-hit wonder, so you never borrow more than you can afford again. If you stick with the rules of thumb and ask yourself some searching questions before you reach for the credit card, you should be able to stop worrying about your debts. Because while there’s no such thing as good debt and bad debt, the best kind of debts are the ones you’ve already paid off.
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