Choice: High cost of credit in short-term
Personal debt may feel overwhelming, but you can get to grips with it, says Sinead Ryan
T he economy might be improving but Ireland still ranks as the fourth most indebted nation in the EU. Although house prices are rising and more people are at work, our borrowings are stubbornly high. And like charity, that starts at home.
While the Government is not exactly the poster-child for doing things the right way (our national debt is €240bn, which puts the anticipated €3bn proceeds from the AIB sale in context), ordinary household debt is still far too high.
In 2016, we collectively borrowed €12bn outside of any mortgage lending. That’s on car loans, credit cards, etc. Keeping track of it, never mind getting on top of it is very difficult, so this week I’m looking at how ordinary families can avoid getting overwhelmed by the sheer amount of debt they face. Here are my top tips for getting organised.
GOOD VS BAD DEBT
Yes, there is a thing such as ‘good’ debt — it’s borrowing which is used for asset purchase, like a house. Most people need a loan for a car too; if it’s essential to get around and not more than you can easily afford to repay, then that is ‘good’ debt. Bad debt is when you use the bank’s money for day to day spending, eg putting your grocery shopping on your credit card, or taking out a loan for a holiday. It’s fine if you can afford to pay it off quickly, but not if you’re still looking at it in six months’ time.
We don’t usually think of the balance on our credit card as a loan, but it is. If you had to phone up the bank and beg for it each and every time you used it, would you?
TAKE INTEREST
List your debts by the amount of interest they incur starting with the highest alongside what you pay toward each every month. This is usually in the order: credit card, overdraft, personal loan, credit union, PCP finance, mortgage. The highest bearing debts should get your priority money until they’re gone.
Then subtract your monthly debt servicing from your income. What’s left is your working budget for the week/month. Spend any more, and you are reborrowing in a vicious circle. Try to stay within the limit and divert left over cash to pay down the highest interest-bearing debt (see table).
PAY POCKET MONEY
Kids use up a lot of our finance! Try paying them pocket money with conditions. They can’t come looking for more (they’ll spend it all on day one, but they’ll soon learn), and they must save half, before they can spend half. They should save for something they really want, like football boots, a bike or summer holiday money.
DEBT ALTERNATIVES
Can you move or consolidate debts? For instance, the credit union, charging 7pc pa might take on your credit card (20pc) and you can pay it down more effectively. But don’t flash the plastic until it’s all gone. Even moving to a 0pc interest card (PTSB, Bank of Ireland) will give you more breathing space to pay off debt.
USE SAVINGS
Most of us have savings put away earning nothing at all, while our debts are hammered with interest. In fact, Irish households have over €90bn stashed in deposit accounts and post office savings. This makes no sense if they are also in debt. Using savings to get rid of loans frees up monthly cash so you can start saving again.
GET HELP
If you are genuinely under water financially and cannot, despite your best efforts, make headway into debt, there are plenty of agencies to help. In the first instance try MABS (0761 07 2000). Not only will they help you with a budget plan, they will get your debtors off your back and let you gain control. The Insolvency Service (isi.gov. ie) is for debts you cannot overcome — there are four options available, with free advice, and again, you won’t have to directly contact your creditors ever again. The phone calls and the letters will stop, which most people find even more of a relief than the debt forgiveness.