Consumer debt is becoming one of the scourges of modern life with average debts per household soaring. I’m not talking about loans and debt used to buy assets, such as houses or commercial buildings, but credit used to buy depreciating consumer goods like cars, TV’s and furniture.
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In an earlier podcast episode, I talked about the rent-to-own stores which prey on the poorer members of society selling them consumer items at ridiculous prices and then charging extortionate interest rates on top!
Whatever the reasons for getting into serious debt, if you want to live without worry and fear it is vitally important to get out of debt fast and stay debt free forever.
Here are my 12 steps to get out of debt fast and stay out of debt for good
- Prioritise debts in order of importance and cost of servicing the debt. Obvious priorities are things like keeping a roof over your head and maintaining power supplies, rather than paying those who are shouting the loudest. Look at the cost of your loans or credit cards and clear the debts with the highest interest rate or repayment. Clearing the high cost debts first will give you breathing space to pay off other debts faster by saving money on interest.
- Slash non-essential outgoings. Go through all your standing orders and direct debits and ruthlessly cut out everything you don’t need, especially things like Sky TV or that membership of the gym you only visit once a month. Exercise at home and find a way to walk more often.
- Make a plan to start paying off debts and stick to it. Most people don’t realise that if you just pay the minimum amount required on a credit card it will take several years before the debt is paid off. Start clearing expensive debts first so that you can reduce the rising tide of compound interest drowning you by by increasing your balance faster than you can clear it. List all debts and monthly repayments on a spreadsheet and plan your route to financial freedom. This one step of making a list of your debts will make a huge difference.
- Get a balance transfer card. Whilst this is a short-term measure, transferring credit card balances from high interest charging companies to 0% cards will give you breathing space. Watch out for the balance transfer fees which can be a high as 3%. Sometimes it can be cheaper in the long run to pay a small interest rates with no balance transfer fees.
- Earn extra cash. One of the most obvious ways of reducing your debts is to increase your income. This can be achieved in a number of ways including starting part-time business, working extra hours, qualifying for a pay rise or getting a higher paid job.
- Check if you are entitled to any benefits or tax credits. This especially applies to single parents and people in low paid work. It’s more benefit or tax break could transform your finances overnight. To find out more check on the government website or see citizens advice if you live in the UK.
- Never ignore a bill, demand and especially a debt collector or court letter. Burying your head in the sand will not make the problem go away and ignoring any of the above will make matters worse and cost you more in the long run with interest and penalties. Ignoring bills and letters will ultimately lead to County Court Judgements and debt defaults which will stay on your record and credit file for six years and effectively ruining your credit rating.
- Speak to your creditors if you are having difficulties.
- Ask for help. This could involve your Citizens Advice office, an independent debt counsellor or even a relative. We all need a little help from time to time and being in debt can be lonely and depressing.
- Stay out of consumer debt for good. Never borrow to buy expensive consumer items which depreciate in value and avoid rip-off deals like rent to own products like the plague. The old adage of “if you can’t afford it do without it” should be drummed into this modern ‘I want it now’ age! We have become too accustomed to the ‘buy now pay later’ culture of easy credit, which should be called easy debt, and keeping up with the joneses, which I mention in my forthcoming book ‘Yes, Money Can Buy You Happiness’.
- Never use expensive payday lenders, unless you have no other choice, and especially unauthorised doorstep lenders will charge you a small fortune interest.
- Start building your credit rating by making repayments on time and clearing credit cards faster. The higher your credit rating, the more access you will have to cheaper finance and the less you will be dependent on expensive credit.
Finally, measure and monitor to keep the momentum and maintain and debt free lifestyle.