Don`t ignore debt - act on it now

18 January 2010

Different people get out of debt at different speeds. For some, getting `back in the black` is something that takes months; for others, it can take years.

There are various factors that could affect this, such as...

How much debt are you carrying?

The biggest single factor here is the amount owed - not as an actual amount, but in relation to the borrower`s disposable income*. Clearly, someone with a well-paid job and no big commitments (mortgage/rent, children, etc.) could probably clear a £1,000 debt faster than someone who works part-time could clear a £500 debt.

What kind of debt are you carrying?

The size of a debt isn`t the only issue - there`s also the question of what kind of debt it is.

A credit card debt, for example, is totally different to a personal loan. A loan is a one-off sum of money which is gradually repaid over a set period of time, while a credit card gives the borrower access to a certain amount of credit which they don`t have to access or pay back in any particular way (although they will be required to pay at least a minimum amount every month).

When it comes to repayments, the credit card debt might sound more appealing since it gives the borrower the opportunity to pay just the minimum every month if they want to. However, this isn`t necessarily a good thing - unless they`re disciplined enough to make more than the minimum payment, even a relatively small credit card debt can take many years to clear (which means it`ll have a long time to accrue interest).

Having said that, someone who`s confident they`ll repay as much as they can every month could choose to borrow on a credit card (rather than a loan) for that very reason - so they can clear their debt as quickly as possible by figuring out the maximum they can afford to pay on a monthly basis.

Could you clear your debt faster than you are doing?

And of course, the way you tackle your debt is another major factor: someone who`s determined to put as much as they can afford towards their debts every month is obviously likely to repay what they owe a lot faster than someone who tries not to think about their debts.

Depending on what you owe, what you earn and what you spend (among other things), there are different ways of clearing your debts faster.

A good way to clear your debt faster is to overpay it (to pay more than you`re obliged to on a monthly basis). Credit card debt isn`t the only kind of debt that allows this - many mortgages, for example, allow the mortgage holder to overpay (in fact, many homeowners have taken advantage of today`s low interest rates to clear their mortgage debt more rapidly than they expected to when they bought their home).

Some people may choose to cut back on luxuries and non-essential spending so they can focus on overpaying their debt until it has been paid off entirely.

If you`re not sure how to clear your debt, or if you`d just like some advice, it`s a good idea to talk to a professional debt adviser, who can assess your situation and recommend an appropriate way out of debt.

The sooner the better

But however you choose to tackle your debt, the sooner you start really focusing on it, the better. There are various reasons for this - such as...

• First of all, the sooner you start really tackling your debts, the sooner you`ll finish.
• Second, the sooner you`re out of debt, the sooner you`ll stop paying interest - which means you`ll pay less in total.
• Third, carrying debt can be dangerous. No-one`s financial situation is set in stone. If you lost your job tomorrow, would you be able to keep on making your debt payments - or would your debts rapidly get out of control?

* Disposable income equals total income minus total essential expenditure - it`s the amount of money an individual has left after they`ve taken all their essential costs into account. Disposable income is the money which is available for putting towards unsecured debts, saving, and spending on non-essential goods and services.

Top of page