Borrowing to make purchases can leave you paying the price long after you’ve forgotten what you bought
How does debt affect your finances?
Running up debt is easy, but it can take decades to pay back, as well as prevent you from putting your money towards other things, such as a house or new car. It can also have a knock-on effect on your future lifestyle. Existing debts will affect future applications for credit – even if you never miss a payment. For example, when applying for a mortgage the lender will take a look at your credit file and see how much you owe, which will affect your mortgage affordability calculations. That could mean the bank offers to lend you less than you’d hoped, affecting what property you can buy.
Despite the ongoing effect debt can have on lifestyle, when people worry about their finances the focus tends to be on saving rather than paying off debt. But the current interest rates on savings accounts are very low. This means, in all likelihood, the amount of interest mounting up against debt will be far higher than the potential interest earned on savings. So it makes better financial sense to clear debts rather than save.
Getting things under control
The good news is there are several ways you can bring your debts under control and speed up the process of clearing them. First of all, it's important to keep spending under control. Setting a weekly or monthly budget, and sticking to it, can help you get a clear idea of where your money is going, and see where you can make cutbacks. A study by Royal London found that 37% of people had a much better understanding of their finances after they started budgeting.
Next up, minimise the interest you are paying on your debt. The best way to do this is by moving it onto a 0% credit card. There are deals out there that can mean you pay no interest on your debt for several years, giving lots of time to clear your debt without it growing any further.
Finally, work out how much you can afford to pay off your debt each month and stick to it. Paying off a fixed sum each month rather than just the minimum payments can dramatically speed up the time it takes you to clear your debt.
If you need more information or support, read our article on where you can go to get help with debt.
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Should you take your debt more seriously?
Borrowing to make purchases can leave you paying the price long after you’ve forgotten what you bought.