Debt and stress are connected. When you are in debt, you are more likely to be stressed. And when you are stressed, you are more likely to make poor financial decisions.
The connection between stress and debt is one of the reasons that the Citizens Advice Bureaux in England and Wales deals with 4,495 debt-related problems every working day. To make matters worse, manipulative marketing can lure unwary consumers into a vicious spiral of indebtedness. By educating yourself about debt management options, you can understand the best route out of debt.
Not Paying off your Credit Card
Not paying off your credit card can have serious consequences, especially if you leave it to rack up month after month. First, you’ll be fined by the credit card company itself, and then you’ll be hit by the credit card’s interest fees. The average credit card interest rate in the UK recently hit an all-time high of 21.6% APR, with some credit card retailers charging as much as 50%.
Arguably, the most serious consequence of not paying off your credit card debt is that it will effect your credit score, making it extremely difficult for you to take out other loans, get a mortgage, or buy a car.
Payday loans are small, unsecured, short-term loans. They’re known as payday loans because they are marketed as a way to cover unexpected expenses until payday.
When you take out a payday loan, you’re nearly always facing sky-high interest rates, with some being as high as 7,000%. This can trap you in a cycle of debt where you’re unable to pay off the interest on your original loan.
Despite the fact payday loan companies have increasingly had legal action taken out against their unethical business practices, they remain a very popular option in the UK. Be careful, and don’t let yourself be duped.
Consolidation loans are when you take several of your outstanding debts and then consolidate them into a single loan, which you can (supposedly) use to pay off your debts. Consolidation loans are dangerous because they give the illusion that you’re dealing with your debt. In reality, you’re accruing significant interest on top of your original debt.
Another way in which consolidation loans can trick you into paying back more than you originally owed is by extending the period you have to pay back the lender. Although this might sound tempting in the short term, in reality, because the interest rates are charged for a longer period, you pay back an amount significantly larger than your original loan.
Balance Transfer Deals
A balance transfer is an option offered by many credit card companies to move an outstanding balance from one credit card to another, therefore (seemingly) giving you more time to pay off the balance.
Balance transfers are wolves in sheep’s clothing. Although they may sound very tempting, in most scenarios, credit card companies will charge a hefty fee for moving your balance. When you transfer a debt to another card, you’re traditionally given a grace period. Under this false sense of security, you can end up accidentally spending more and therefore increasing the amount of your original debt — without paying off any of the original balance. To make matters worse, balance transfer deals almost always deplete your credit score, leaving you with a series of long-term financial issues in addition to your debt.
Institutions Claiming they can Assist You in Rescheduling Debt
There are a number of institutions in the debt market who claim they can help reschedule your debt payments, or even write them off, therefore freeing up more of your cash flow on a month-by-month basis.
Before we get started on this, it’s very important to remember that there are some legitimate businesses who can assist you with scheduling your debt payments. Many of these use groundbreaking debt management software, which enables them to automate, manage and drive debt repayment.
However, there are many businesses who will claim that they’re going to help you, but in reality, they’ll charge an enormous administrative fee and only increase your debt. This is because when you reschedule your debt, what you’re really doing is restructuring your original loan so that you’re now paying out over a longer period of time. As we covered above, this has potentially dangerous consequences, with you paying for interest rates in addition to admin fees.
Debt can be challenging to deal with, but don’t let the stress of being in debt cloud your judgement. Research your options, and carefully consider the various choices you have. Most importantly, get expert financial advice from an impartial professional. By staying and approaching the problem logically, you can determine the best route out of debt.
Yaakov Smith has twenty years of experience with developing, configuring and writing software. He is the owner and founding manager of Logican Solutions Ltd, which offers a range of industry-specific products, including claims management software, debt management software and property portfolio management software.