Debt Management: Reducing Your Debt
If you’ve seen the latest figures from the Bank of England, you’ll know that the ‘net lending’ figures have been pretty low recently.
In July, we collectively borrowed £173m more than we repaid, in terms of unsecured debt. That may sound like a lot, but look back to 2006 and you’ll see that the monthly average was more like £1bn.
Remember that the net lending figures show how the total outstanding debt has changed – they show how much extra people have borrowed minus how much they have repaid. So when people don’t borrow much but do repay a fair bit, it’s quite possible to see negative net lending figures. In fact, this has already happened twice this year, and it happened in 7 of the 12 months in 2009.
So the lending figures can tell you a lot about people’s determination to improve their debt management skills and repay their debts – as well as about lenders’ current attitude to lending.
One thing that’s clear in 2009 and 2010 is that people have been paying a lot more attention to improving their debt management skills and reducing their debts. There’s a lot of uncertainty about the economy’s future and many borrowers are responding by not taking on any more debt – and trying their best to repay what they already owe.
It’s good to see. Carrying debt can be risky as well as expensive: if your income falls in the future, you could easily find that the debt you’ve been repaying comfortably has become an almost impossible challenge. If you can afford to overpay now, in other words, it makes sense to do so.
‘Overpay’ means just that – paying more than you actually have to pay towards a certain debt. If you can afford to pay a bit more towards your credit card bill, for example, whether it’s an extra £5 or £200, it’s well worth doing. Every penny you pay off is a penny that won’t be accruing any more interest, so you could save a lot of money over the time it takes you to clear that credit card debt altogether.
And by reducing your debt more quickly than expected, you’ll be debt-free sooner. That can make a big difference to your long-term finances – as soon as your debts are gone, you’ll have more money to spend on things you really want, whether it’s a holiday, home improvements or your pension fund.
Plus, the sooner you can clear your debts altogether, the safer you’ll be if anything goes wrong – coping with a drop in income is never easy, but it’s a lot harder when you still have to find money for your unsecured debt payments every month.
What’s more, you can decide about your overpayments on a month-by-month basis – you won’t have to commit yourself to doing this every month from now on, as certain debts let you pay as much as you like, as long as it’s at least equal to the minimum required repayment.
To get the most out of overpaying, it’s important that you work on your debt management skills. For example, you’ll need to figure out which debt you should be overpaying. If you’re carrying three debts at 8%, 9% and 17%, it makes sense to start by clearing the one that’s charging an APR of 17%. Once that debt is completely gone, you’ll be able to move on to the 9% debt.
For psychological reasons, some people will prefer to start by focusing on their smallest debt, as it gives them a real sense of achievement to see one of their debts disappear altogether. Staying motivated is important when you’re trying your best to reduce your debts, so this kind of approach really works for some people – but with others, it’s all about the maths, which means they’re more likely to go for the ‘highest-interest debt first’ approach.
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