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6 Quick Tips to Help to Be Savvy When Using Debt

6 Quick Tips to Help to Be Savvy When Using Debt

How to Be Savvy With Debt in the UK

It’s extremely uncommon to meet anyone who doesn’t have at least some sort of monetary debt. Whether that’s in the form of a mortgage, payday loans, a credit card, bad credit loans, there’s so many products out there that encourage us to have debt.

While it might seem overwhelming, being in debt is not necessarily a bad thing. For instance, it allows you to prove your potential as a borrower, and if managed in the right way, really helps your credit score. It is incredibly important that you don’t take out more than you can pay off, however, and you should always endeavour to live within your means.

The reality is that most people will experience debt at some point in their lives, so it’s important to focus on the positive aspects of how certain debt can help you grow. You must consider before you take out any kind of financial commitment that you absolutely can afford the minimum payment, and that you only ever borrow money if the positives outweigh the negatives.

a desk with paper bills a calculator and a pen on

Let’s have a look at some examples and scenarios around debt and how to try and best manage it:

1. Could You Consolidate?

There’s a lot of people out there that have more than one type of outstanding loan/credit card. The average UK household debt at the moment is around £20,000+ (excluding a mortgage), which is often spread across multiple credit and loan options – usually, two or three credit cards.

A consolidation loan requires taking out a new loan, equal to or greater than their total amount of your debt. The idea here is – to pay off every outstanding balance and consolidate your monthly payments into one manageable loan.

This may have several benefits for you. Utilising a consolidation can reduce your total monthly repayable amount, meaning you have more money each month to put towards your loan, or other things. You’ll be making a smaller number of payments, so it’s likely that you’ll be paying less interest over time. It will also be much easier to keep track of your outgoings and work on bringing that balance down.

2. Larger Purchases and Priorities

We took a dive into some of our loan application data to see what was among the top trends for larger personal loan requests. The data was interesting to see, with ‘vehicle’ coming out on top and ‘household goods’ as the least popular purpose of a larger loan. We’ve compiled a table below of the full results as a visual for you:

Loan Purpose: Volume of Requests:
Vehicle 3268
Debt consolidation 1748
Other 1453
Home improvement 1057
Special occasion  895
Household goods 448

The reason we’ve pulled this data is to highlight what peoples priorities seem to be. Is it really worth taking out a loan for that car you really want? Do you really need to be spending large amounts of money on household goods? The point we’re trying to make here is that you should consider your wants versus your needs, so prioritise accordingly to avoid unnecessary debt.

3. Utility Bills

Utility bills never seem to get any better as the cost of living keeps increasing. There are certain ways you can manage these bills even if you fall into debt with them. First things first – contact the company who provides you your utility. They will be able to look at payment plans to try and suit your circumstances and affordability.

There’s also a lot of government help available (especially in the energy industry) which you can easily find online.

4. Working on Credit Score Growth

One of the primary uses of taking out credit is to build up your credit profile. You need to be able to show that you can reliably pay back your debts in order to gain more favourable interest rates and access to higher credit limits.

The longer you hold a loan or credit card for without missing any payments will show to any future potential lender you’re a reliable customer and will not be a lending risk to their business. The higher your credit score is – the more money you can end up saving! Below, we bullet point some of the top examples that assist in credit score growth:

  • Make sure you’re paying on time
  • Report any errors or mistakes on your file
  • Keep a frequent eye on your report
  • Show longer credit agreements over short ones
  • Keep your credit utilisation as low as possible (aim below 30%)

someone writing how to be savvy with debt

5. Assess the Downsides of Borrowing

Borrowing money can be useful and at times might be a necessity. It does come with a set of risks that you should always take into consideration.

Can you afford the minimum payments? Do you have the intention of clearing the borrowed money early? Do you already have a large amount of debt?

If you’re not able to make the minimum repayments at the lease, the total amount of money you will need to pay back will increase over time. The lender will probably look to add a note on your credit file, along with fees or charges for late or non-payment situations.

Depending on the type of loan (unsecured, secured for example) there can also be more severe consequences, such as court summons or even a repossession of personal property.

Don’t let these risks scare you away from taking out credit if you do need it, as it is ever-important to build a respectable credit score. Live within your means, making sure that your monthly outgoings do not exceed your income.

6. Are You Struggling With Debt?

If you are struggling with debt, there are plenty of support networks that exist to provide the help that you need. A good place to start would be StepChange, who can offer free debt advice and support, with the aim to help you tackle your debt altogether.

 

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