Debt reduction in times of high inflation
Not just the kind of ‘debt’ that’s part of life – the mortgage and a few hundred pounds on the credit card that’s paid off in full each month. The kind of debt that accumulates and is difficult to repay.
It arises from desperation – when the monthly income reaches its limits, the savings pot is scratched empty and there is no other choice than to use the credit card or the overdraft facility.
This week, the Office for National Statistics said inflation for the year to August was 9.9% – down from 10.1% in July.
This – albeit small – decline resulted from a slight drop in petrol prices. It came just as Prime Minister Liz Truss introduced the Energy Price Guarantee, which will cap household energy bills and give billpayers some respite.
But even if these ease some of the pressure, it would be wrong to say that the cost-of-living crisis is abating. In fact, food prices are up 13.1% over the year, with some staples like skim milk up as much as 40%. Butter and jam rose almost 30%.
And that’s just breakfast.
Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown, said: “Grocery is the price hike we’re feeling the most – 96% of people say their food costs have gone up.
“It’s one of the costs that hits low-income people disproportionately because once they’ve shopped and bartered, the only thing left for them to do is shop less, which can mean some impossible decisions at the supermarket.”
Meanwhile, Alice Haine, personal finance analyst at Bestinvest, said some households have already “cut their spending to the max,” leaving them “little leeway for unexpected spending.”
No wonder so many of us turn to credit cards to make ends meet.
So what do you do when you start accumulating unusual amounts of debt? What steps can you take to keep it from getting out of hand?
According to Alice, managing those overspending should be the focus of your finances until they’re in a more manageable state.
“For those on the brink of a debt problem, make paying off high-yield credit card balances a priority over saving or investing. You will not over-save or over-invest at an annual credit card rate of 20% or more.”
How zero percent credit cards can help you with debt management
If you don’t pay back the full amount each month, credit card interest will add to the debt. Therefore, a 0% credit card could help you pay off the balance faster.
According to The Money Charity, the average credit card debt per household is £2,229 and if a borrower only pays £100 a month as the minimum repayment, it would take over two years to pay it off
Rachel Springall, Finance Expert at Moneyfacts said: “Credit cards are a convenient payment method and a useful safety net when someone has little disposable income. Those using these for purchases would do well to move their debt to an interest-free balance transfer card to avoid interest charges.”
Visit Moneyfacts.co.uk for the latest and greatest offers on prepaid transfers. Some deals offer 0% interest for up to 36 months.
There’s some paperwork to do and there’s a fee too – so make sure you take that fee into account when you’re comparing offers.
If you have multiple credit cards with large and unmanageable debts, or other forms of borrowing such as store cards or overdrafts, it may be worth “consolidating” them.
In a nutshell, this means bundling all of your debt in one place—like a loan.
Rachel said, “An unsecured personal loan can be used to consolidate credit card debt in one place and can be easier for someone to manage to pay back.”
She explained that in early September the lowest interest rate on offer on a £10,000 five-year loan was 2.8% from M&S Bank, costing around £718 in interest.
“Borrowers are not guaranteed the lowest interest rate and it is worth noting that at least 51% of successful applicants must be offered the advertised interest rate and early repayment fees may apply if customers decide to switch their existing loan,” added Rachel added.
Get help if you’re in financial trouble
If you find you can’t apply for credit cards and loans are being declined, don’t despair. It can feeling hopeless, but there is actually plenty of help and support out there if you find yourself in this situation.
Visit The Money Charity’s website for more information on the options open to you. Learn about debt management plans and other ways to take control of your finances.
There is also another charity, StepChange, that can help you with more personalized advice. You can also contact Citizen’s Advice for assistance.