The Path to Financial Freedom

As you will have noticed, everything costs money, and these days, usually lots of it.

Having the things you need – from a car to a winter coat – when you need them might mean borrowing. Debt is (almost always) a costly burden, even if sometimes it cannot be avoided.

But not all debt is created equal, and some have the potential to be positively dangerous.

Your mortgage for example, is unavoidable if you want to own your home in many cases. But it is relatively benign, and it should be fairly easy for you to manage, with predictable costs that can fit your monthly budget.

But what about high-interest debt?

High-interest debt and you

High-interest debt can be defined as any form of borrowing, that charges interest rates significantly above the average market rate. This often includes some finance agreements, payday loans, and personal loans from non-traditional lenders. Credit card debt is a particularly common form of high-interest debt.

If you have high-interest debt, it is costing you money – potentially many times the value of the things you bought with it. Those costs go on growing month after month, and they can hinder your financial security.

High-interest debt is a severe problem for several reasons:

It is easy to get into. A wave of the card, for example, and there it is, ready to start growing with monthly interest.

It is hard to get out of. High interest rates mean that a significant portion of your monthly payments goes towards interest rather than reducing the principal balance. This means a prolonged repayment period, costs that are multiplied, and quite possibly a debt that keeps on growing.

Emotional Stress: The burden of high-interest debt constantly adding up in the background may lead to stress and anxiety, affecting your mental and emotional well-being. Worrying about debt can have a negative impact on your overall quality of life now, and your ability to plan for the future.

Reduced Savings: High-interest debt can make it very difficult to save for future goals, such as buying a home, investing, or saving for retirement. The more you divert your income towards debt payments, the less you have available for saving and investing.

Techniques for dealing with high-interest debt

So high-interest debt needs to be dealt with, as quickly as possible, and there is a proven set of steps to follow to get out of it. It might be an uncomfortable experience, but getting out of debt will make it worth the sacrifice.

Create a budget: Start by creating a detailed budget with your monthly income and expenses, and how much you can afford to pay off your debt. See where you can cut back and allocate extra funds towards debt repayment.

List all your high-interest debts. Work out which are the credit cards with the highest interest rates and pay them off first. Make minimum payments on other debts while aggressively attacking the highest interest rate debt.

Avoid more debt. Theres no point paying off high-interest debt if you just take on more. Cut up credit cards and resist the urge to buy anything you could possibly do without. 

Consolidate or Refinance. You can move around many types of debt balances, especially things like credit cards. It makes sense to put all your debts in one place, where they are easy to deal with, and especially if it means reducing the rate you pay.

This is where a 0% interest credit card can be so very useful. Many card issuers will offer a 0% period for new customers.

If you can take out a suitable card and transfer all your high-interest debt to it, you can be instantly better off, as your debt will not grow during the introductory period. Never use the card for anything other than dealing with existing debt, and ideally, pay it all off before the card issuer starts charging interest again.

If you can’t get a 0% card, at least look at consolidating your debt. This can involve taking out a personal loan at a lower interest rate to pay off multiple high-interest debts. Be cautious, however, as this approach may only be suitable if you can secure a lower interest rate.

Seek Professional Help. If your high-interest debt is overwhelming, consider seeking assistance from a financial adviser. They can provide expert guidance and help you develop a structured plan to tackle your debts.

At Continuum we help many of our clients deal with high-interest debt as the first step towards a brighter financial future.

To make a first step towards yours, call us today.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, you should seek independent financial advice before embarking on any course of action.

Your home may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate debt management and some aspects of secured and unsecured loans.

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