Your Money: How to sidestep costly debt traps
A savvy approach to budgeting can reduce the risks of expensive borrowing
Alarming financial news emerged last week when it was revealed the national debt stands at €206bn. It's the equivalent of €42,500 for every man, woman and child, and if you think that's just the 'Government's problem', think again.
To put it in perspective, it's 12 times the entire health budget. The interest payments alone are €5.2bn, and rising.
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It's like maxing out your credit card, only making the minimum payment and every few months rolling it all on to a new card. Nobody would organise their family finances the way the Government handles ours. Nevertheless, with many in debt, I'm looking at better ways of handling money problems.
Good debt v bad debt
Not all debt is bad. Lots of things have to be financed by loans; a mortgage the biggest one. Borrowing over a long time with affordable repayments is normal. If you need a car, than borrowing over as short a period as possible is also OK. Bad debt is when you use credit to pay for day-to-day spending. Putting your groceries or electricity bill on a credit card, for instance, or buying a holiday with an overdraft. This builds up debt fast, as it becomes a habit.
The top-down method
List all your debts in order of the interest, highest first. That's usually a credit card, which may be above 20pc. It means you're paying a fifth more for every single purchase. Making the minimum payment (typically 2.5pc of the bill) ensures you will never pay it off. Prioritising high-interest debt frees you up on the double: you lose the capital debt and the 'servicing' money every month. Visa now operates all debit cards in the EU - use it instead. When this debt is cleared, move down to the next type, probably a personal loan at 10-14pc, and so on.
The snowball effect
This is the opposite approach. There's a psychological boost in clearing off a debt, any debt. So tackling the smallest one first can encourage you to go at the others.
Again, list all debts, but this time in order of size outstanding. Throw as much as you can at the lowest and get rid of it, freeing up that and more for the next one on the list.
The consolidation approach
If you have a lot of loans, bundling them into one big loan at lower interest can sometimes make sense.
Add up your top three debts (credit cards, money lenders and personal loans) and ask your local credit union for a quote.
You do not have to be a member, but it's vital you do not build up extra debt while you're paying this off, otherwise you'll be worse off than before.
Copy your gran
In days past, people had to lay out their case for borrowing in person, in front of a bank manager, waiting days or weeks for an answer. It's far too easy to 'click' into credit today, so consider every item on your credit card like this: if you had to beg the bank in person for that €200 for a new outfit, would you still want it and wait for it?
Three things to do today
1. Stop using contactless payments. It may 'only' be €30, but it's a bad habit, especially on credit cards. The discipline of entering a Pin number gives you a moment to reconsider.
2. Keep your receipts. Find a place in your wallet/purse to keep every single receipt for every purchase. At the end of the week, take them all out and add them up. You'll be shocked.
3. Use cash. Ditch the plastic. Withdraw cash on a Monday morning and see how long it lasts. If you're out by Wednesday, you need to sit down and re-budget your expenditure.