In the bank yesterday I was waiting for about 20 minutes for some bank statements to be printed out, and couldn’t help but overhear the advice being given to the woman at the next customer service desk. From what I could tell, she wanted to take out a £15,000 personal loan to repay credit card debt. She had a mortgage with another bank, and the customer service officer was instead encouraging her to remortgage her home for the entire amount of her debts – in other words she was being ‘advised’ to secure her credit card debts against her home.
I have to tell you that it took every fibre of my being to resist leaning over and telling her to run in the opposite direction as fast as she could.
This woman, other than knowing the total amount of her debt, didn’t seem to know much about the state of her own finances. She didn’t know the interest rates on her credit cards, nor did she know the interest rate of her mortgage off the top of her head. She was being sold a remortgage that would spread her debts over a longer period, so that her monthly payments were less than she was currently paying. In other words, she was going to repay more over the term of the new mortgage than she would have by keeping her debts separate and tackling them individually. It got me thinking about the top five things people should keep in mind when thinking how best to manage debt.
1. Think really, really, really, REALLY hard before securing any debts against your home. This is a basic thing that many people overlook, especially when dealing with debt consolidation. Fall behind on your repayments and you could lose your home. Unless you are currently unable to keep up with your repayments, never secure credit card debt against your home.
2. Longer repayment periods equal higher total loan cost. It might seem more attractive to repay a lower amount each month when taking out a loan, but the longer you take to repay the loan, the more expensive it will be overall. Throw all your available cash at your debts to repay them as quickly as you can.
3. Stay on top of things! If you have multiple debts, or debts on variable interest rates, keep on top of which debt is the most expensive, and repay this debt first while making minimum repayments on all the rest. If you are informed of an interest rate change, look around for another option, or speak to your lender about avoiding this if at all possible. It’s up to you to keep on top of these things so you don’t throw money away on unnecessarily high interest rates.
4. Your bank manager is not a financial advisor. I’m pretty sure that the clueless woman in the bank thought she was being given sound financial advice. She wasn’t. She was being sold a financial product. There is a massive difference! If you don’t want to sort through the jargon yourself, see an independent financial advisor – even if you have to pay for the advice it will be better than making costly mistakes.
5. If you really can’t keep up with separate credit card or personal loan debts, a debt consolidation loan can be a good option, if the other alternative is to fall behind on your repayments. Remember to shop around and find the cheapest possible option available for your circumstances. If you have a poor credit rating, this will be more difficult, but it is possible – just make sure you don’t use it as a ticket to keep spending. Debt consolidation loans are the ‘get out of jail free card’ of the personal finance world. They might be easy to organise the first time around, but the second or third time might be impossible to find affordably if you continue to run up other debts. Think of it as a reality check and get your finances in order.