Debt is a common part of everyday life, and many people will borrow money at some stage through loans,
credit cards, mortgages, or buy now pay later products. Debt becomes a problem when repayments become
unmanageable, causing stress and financial difficulty but the first step in preventing debt is to understand it.
Understanding debt
Debt is when you borrow money and agree to repay it, this is usually with additional interest added. There are two main types of debt:
Secured debt – this is specifically linked to an asset. For example, mortgage or car finance
Unsecured debt – this is not linked to an asset. For example, personal loans, credit cards, and overdrafts
How does interest work?
Lenders will often charge a percentage of interest for borrowing money and this can add up or grow quickly, especially with credit card or loan payments. Once these charges start growing it makes the original loan amount harder and longer to re-pay.
Warning signs you might be getting into debt
It’s important to acknowledge when you think you’re starting to struggle, this prevents any debts getting worse. Some of the signs you might see if you’re starting to struggle are:
- Relying on credit cards to cover everyday expenses
- Missing payments or making late payments
- Receiving letters or calls from the creditors
- Going into your overdraft every month
- Feel anxious about finances
Know your numbers
It’s important to understand your own financial situation and basic costs. You can do this by looking at some simple figures such as:
- Your income – This includes things like wages, any benefits, and pensions
- Essential spending – This is things like mortgages, rent, utility bills, and food
- Non-essential spending – This includes things like subscriptions, and leisure activities
- All debts and repayment amounts
Once you have a clear understanding of your incoming payments and outgoings, doing a simple monthly budget can really help you stay in control.
There are also many budgeting and spending diary templates you can download online that can be really helpful.
Understanding debt
The best thing you can do if you’re struggling to make payments is to talk to your creditors (the people who have lent you the money). By having good early communication, they might be able to:
Offer a temporary reduction
in payments
Freeze interest for a
period of time
Give you more time to pay
As well as talking to the creditor directly there are also a number of different free services that can give you advice on the best way forward or help you put a manageable payment plan in place.
How can you reduce debt?
There are a few simple things that you can put into place that can reduce debt. For example:
- Create a repayment plan that is realistic for you and your financial situation
- Cut out any non-essential spending
- Avoid taking on more credit
- Research into whether debt consolidation would reduce long-term costs
Support
There are many different places that you can get support with debt and finances. Some free, confidential advice is available from:
