Thursday, 10 March 2011
Sunday, 6 March 2011
Managing Debt - Top 10 Things You Need To Know About Managing Your Debts
Top 10 Things You Need To Know About Managing Your Debts
1. People are loaded with credit card debt.
The average household with at least one credit card has nearly £6,500 in credit-card debt, and the average interest rate runs in the mid- to high teens at any given time.
2. Some debt is good.
Borrowing for a home or university usually makes good sense. Just make sure you don't borrow more than you can afford to pay back, and shop around for the best rates.
3. Some debt is bad.
Don't use a credit card to pay for things you consume quickly, such as meals, groceries and holidays, if you can't afford to pay off your monthly bill in full in a month or two. There's no faster way to fall into debt. Instead, put aside some cash each month for these items so you can pay the bill in full. If there's something you really want, but it's expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it's due and avoid interest charges.
4. Get a handle on your spending
Most people spend thousands of pounds or dollars without much thought to what they're buying. Write down everything you spend for a month, cut back on things you don't need, and start saving the money left over or use it to reduce your debt more quickly.
5. Pay off your highest-rate debts first
The key to getting out of debt efficiently is first to pay down the balances of loans or credit cards that charge the most interest while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.
6. Don't fall into the minimum trap
If you just pay the minimum due on credit-card bills, you'll barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance, and potentially you'll end up spending thousands of pounds more than the original amount you charged. This is particularly important when rates are high like now. It could take 40 years to clear a card using this method.
7. Watch where you borrow
It may be convenient to borrow against your home to pay off debt, but it can be dangerous. You could lose your home or fall short of your investing goals at retirement.
8. Expect the unexpected
Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don't have an emergency fund, a home emergency or damaged car can seriously upset your finances.
9. Don't be so quick to pay down your mortgage
Don't pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on a mortgage loan. (If your mortgage has a high rate and you want to lower your monthly payments, consider re-mortgaging).
10. Get help as soon as you need it
If you have more debt than you can manage, get help before your debt breaks your back. Contact us today for free to talk about what solutions may be available to you to help solve your debt problems.
1. People are loaded with credit card debt.
The average household with at least one credit card has nearly £6,500 in credit-card debt, and the average interest rate runs in the mid- to high teens at any given time.
2. Some debt is good.
Borrowing for a home or university usually makes good sense. Just make sure you don't borrow more than you can afford to pay back, and shop around for the best rates.
3. Some debt is bad.
Don't use a credit card to pay for things you consume quickly, such as meals, groceries and holidays, if you can't afford to pay off your monthly bill in full in a month or two. There's no faster way to fall into debt. Instead, put aside some cash each month for these items so you can pay the bill in full. If there's something you really want, but it's expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it's due and avoid interest charges.
4. Get a handle on your spending
Most people spend thousands of pounds or dollars without much thought to what they're buying. Write down everything you spend for a month, cut back on things you don't need, and start saving the money left over or use it to reduce your debt more quickly.
5. Pay off your highest-rate debts first
The key to getting out of debt efficiently is first to pay down the balances of loans or credit cards that charge the most interest while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.
6. Don't fall into the minimum trap
If you just pay the minimum due on credit-card bills, you'll barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance, and potentially you'll end up spending thousands of pounds more than the original amount you charged. This is particularly important when rates are high like now. It could take 40 years to clear a card using this method.
7. Watch where you borrow
It may be convenient to borrow against your home to pay off debt, but it can be dangerous. You could lose your home or fall short of your investing goals at retirement.
8. Expect the unexpected
Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don't have an emergency fund, a home emergency or damaged car can seriously upset your finances.
9. Don't be so quick to pay down your mortgage
Don't pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on a mortgage loan. (If your mortgage has a high rate and you want to lower your monthly payments, consider re-mortgaging).
10. Get help as soon as you need it
If you have more debt than you can manage, get help before your debt breaks your back. Contact us today for free to talk about what solutions may be available to you to help solve your debt problems.
How Can I Prioritise My Debts?
When you are determining how to pay back your debts, you will need to identify the priority debts. This will mean you can use your available money to settle the most
important debts first.The most important debts aren't necessarily the biggest ones. Priority debts are ones where serious action can be taken against you if you don't pay what you owe.
Some examples of priority debts, and the consequences of not dealing with them, are listed below.
1. Mortgages
If you don't keep up with mortgage payments, the mortgage lender can take legal action to take possession of your house and sell it, for whatever price they want. If the price they get is less than the remaining debt you'll still be liable for the balance
2. Rent
If you fall behind with your rent, your landlord can evict you (and still take you to court for the money you owe).
3. Tax
Not paying tax can lead to you being made bankrupt or worse still going to prison.
4. Utility bills
Gas and electricity companies can disconnect their services to your home if you don't pay their bills. Even a phone bill can be a priority if you need the phone to help you earn your living.
5. Hire purchase (HP) debt
Any debt should be seen as a priority if what you're buying on credit (or 'HP') is essential such as buying a car you need for getting to work.
6. Other priority debts
If any of the following debts are unpaid, a court could use bailiffs to come into your home and take your goods away:
- Council Tax or Business Rates
- Court fines
- Maintenance and child support payments
Your goods would be sold to pay what's owed. If, after this, you still owe money, there's a possibility you might be sent to prison.
You may not lose your home or go to prison for not paying 'non-priority' debts, but you can still be taken to court and ordered to pay what you owe - often with extra costs on top. If you still don't pay after you've been ordered to do so, bailiffs can be used to seize your property.
Examples of non-priority debts include:- credit card or store card arrears
- catalogue arrears
- bank overdrafts and loans
- benefit overpayments
- money borrowed from friends or family
- non-essential goods bought on hire purchase (HP)
However, any debt that results in bankruptcy proceedings is the highest priority. Once bankruptcy starts, any leeway your other creditors gave you will disappear as they try to
protect their debt from the other creditors - it really is very important to respond to any court claims as soon as you can and get advice.
Contact us today for a free discussion
regarding how we can help you manage your debt.Priority Debts
Good Debt vs Bad Debt
Sometimes it makes sense to borrow - a lot of times it doesn't
It is almost impossible to live debt-free; most of us can't pay cash for our homes or our children's educations. But too many of us let debt get out of hand. Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36% of your gross monthly income. That's one metric mortgage lenders consider when they are assessing the creditworthiness of a potential borrower.
It's far too easy to spend more than you can afford, especially when you pay by credit card. The average household with at least one credit card carries nearly a £6,500 balance, and personal bankruptcies have hit all time record highs in recent years.
Of course, avoiding debt at any cost is not smart either if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes
sense and which does not and then wisely managing the money you do borrow.
Good debt includes anything you need but can't afford to pay for up front without wiping out cash reserves totally or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.
Bad debt includes debt you've taken on for things you don't need and can't afford (that trip to the Caribbean, for instance). The worst form of debt is credit-card debt, since it usually carries the highest interest rates.
Sometimes the decision to borrow doesn't hinge on how much cash you have but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense.
Debt is not always a bad thing.
In fact, there are instances where the leveraging power of a loan actually helps put you in a better overall financial position.
The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the less you'll pay in interest over time.
Although it may seem logical to put down every single available penny to cut your interest payments, it isn’t always the best move. You need to consider other issues, such as your need for cash reserves and what if any your investments are earning.
Also, don't pour all your cash into a home if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the mortgage loan. (If your mortgage has a high rate, you can always refinance later if rates fall.
A 15 to 20 percent deposit is traditional and may help buyers get the best mortgage deals. Many homebuyers do put down less - as little as 3 percent in some cases in the past, (however, not common in these tough economic times where 10% is frequently the lowest). But if you do, you'll end up paying higher monthly mortgage repayments because you're borrowing more money, and you may have to pay for a Higher Lending Charge insurance (HLC), which protects the lender in the event you default.
2. Paying for university
When it comes to paying for your children's education, allowing your children to take loans makes far more sense than liquidating or borrowing against your pension fund. That's because your children have plenty of financial sources to draw on for university, but no one is going to give you a scholarship for your retirement. It's also unwise to borrow against your home to cover university fees. If you run into financial difficulties down the road, you risk losing the house.
Your best bet is to save what you can for your children’s educations without compromising your own financial health. Then let your kids borrow what you can't provide, especially if they are eligible for a government-backed grants or loans, which are based on need.
Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it away from the dealer. It also depends on how much cash you have on hand.
If you can pay for the car outright, it makes sense to do so if you plan to keep the car until it dies or for longer than the term of a high-interest car loan or pricey lease. It's also smart to use cash if that money is unlikely to earn more invested than what you would pay in loan interest.
Most people, however, can't afford to put down 100 percent. So the goal is to put down as much as possible without jeopardising your other financial goals and emergency fund. Typically, you won't be able to get a car loan without putting down at least 10 percent. A loan makes most sense if you want to buy a new car and plan to keep it, driving it long after your loan payments have stopped.
You may be tempted to use a home equity loan when buying a car because you're likely to get a lower interest rate than you would on an car loan. But before going this route make sure you can afford the payments. If you default, you could lose your home. And be sure you can pay it off while you still have the car since it's painful to pay for something that has been consigned to the scrapheap.
Leasing a car might be your best bet if the following applies:
- you want a new car every three or four years.
- you want to avoid a down payment of 10 percent to 20 percent.
- you don't drive more than the 15,000 miles a year allowed in most leases.
- you keep your vehicle in good condition so that you avoid end-of-lease penalties.
Remember, it's in the car dealer's best interest to finance at the highest rate possible, so look at what you'll pay overall, not just the monthly amount. If you tell your car dealer you can spend £400 a month, you could end up with a new car for £400 a month based on that fact only, and an uncompetitive interest rate too.
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