10th March '08 - How Britons need to service their debts
British households are paying more of their income servicing their debts than at any point in the last decade.
Personal debt as a proportion of income has risen from 105 per cent in 1997 to 164 per cent over the last year. That is the highest ever recorded and the highest in the developed world.
The cost of families servicing their interest alone has risen to 9 per cent of a household’s disposable income, and total debt servicing is more than double that.
The total amount of interest paid on loans is equivalent to the entire Gross Domestic Product of the Czech Republic.
It is no wonder that more and more people are turning to debt consolidation loans, IVAs and debt management plans and borrowers have now called on Gordon Brown to make it one of his first priorities as Prime Minister to urgently tackle rising levels of personal debt.
When rates rise as expected this summer and probably in the autumn too, many households will not be able to cope.
Many homeowners have asserted that Brown has neglected to tackle this “ticking time bomb” as we are already seeing rising numbers of repossessions and personal bankruptcies.
The best way out of the problem is to stop acquiring new debts and focus on paying at least the minimum payments on your existing debts every month.
This may seem self-evident, but the main reason borrower’s debts are out of control is that it is continually adding too by either new ones or added fees for late payments.
To cut out temptation you can start by getting rid of your credit card and only paying it off. You don’t need credit cards for a safety net or for convenience. Many people seem fine to pay their minimum monthly payments but then re-spend it before the month is out. This means you are constantly paying interest on purchases that may have been made years ago.
If you’re in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, you can get a credit card for emergencies but make sure you take one out with a small limit to begin with.
Another way to control debt is to establish a proper savings account. It is still important to save when paying off debts as it will prevent you from taking on more debt once the old ones are paid off. While this may seem like another place that is taking your money, it is worth it in the long run and provides security should you have any unexpected bills that could encourage you to turn back to a credit card.
To pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn. Many Britons tend to spend more then they earn, turning to store cards and personal loans to fund their high street lifestyle. This is the most common mistake and can be avoided by drawing up a budget plan and tracking exactly where your money goes and has to go.
Most people go into debt as they don’t know how much they are spending or what on. A budget and keeping your cash machine receipts will help you to see where you can cut unnecessary costs.
If you find yourself in serious problems because you are continuously servicing old debts, you should see about changing your financial situation by getting a different job and going after a higher salary. It never hurts to try and increase your salary and you may find that a mere extra £100 per month could make a huge difference to your financial stability and lifestyle.
The author of this article is Heather Ale, who draws on extensive journalistic experience to write on specialist finance matters. She has worked throughout the world and is a leading writer in her field.
This article does not represent ‘financial advice’ as each individual's personal requirements will be unique to their specific needs. If there is something in the article which you wish to rely on, please check those details with the person with whom you arrange financial services such as IVAs, loans or debt management plans.
The views in this article represent those of the author and not those of Netbasic Limited.
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