Author: Melanie Taylor
Alexander Pope wasn't talking about debt when he wrote "A
little learning is a dangerous thing" – but listening to
uninformed gossip is a great way to make your debts worse…
Debt is everywhere. As a nation, we've built up around £1.4
trillion of personal debt. It's hard to get through a day
without hearing stories about getting into debt – or out of it.
There's a wealth of helpful hints and tips out there, but an
equal number of dangerous misunderstandings that can help people
get out of the frying pan and into the fire. Which is why we'd
like to tackle a few of them…
Myth #1 "Always pay high-interest debts first."
If you owe £1,000 to credit card A (at 15% interest) and £1,000
to credit card B (at 25%), then yes – pay off card B first. It's
costing you £100 more a year than card A.
However:
You're risking fines and damage to your credit rating if you
don't make the minimum monthly repayment to every debt. If you
can't afford to, talk to your creditors about lower payments.
If you can't keep all your creditors happy, pay your Priority
debts first (rent / mortgage, secured loans, council tax, etc.),
even if they have a low interest rate. If you don't, you might
lose your home and / or get in serious legal trouble.
Myth #2 "Debt management = debt consolidation."
Debt consolidation means taking out a new loan or mortgage to
pay off debts. This can reduce your monthly payments, but be
careful: when you pay off credit cards or overdrafts, it's easy
to run up fresh debts, making your monthly repayments higher
than ever!
Debt management involves negotiating with creditors, looking
for an affordable way to repay your existing unsecured debts.
They might accept lower monthly payments, freeze interest or
waive charges. You can talk to them yourself or ask a debt
management company to do it for you.
Myth #3 "An IVA is better than bankruptcy."
It's not a question of `better' or `worse'. It depends what's
right for you.
If you're a homeowner, an IVA could be better for you. You're
very unlikely to lose your home, although you may have to
release some equity. Just remember you'll have to spend five
years making regular payments.
If you don't have any assets to lose, bankruptcy could be
quicker and simpler – but (unlike an IVA) it will be publicised
and could even affect your job, depending on the industry you're
in.
Myth #4 "Bailiffs are just a kind of debt collector."
Bailiffs can be private professionals or employed by the court.
They're authorised to take away your possessions so they can be
sold to pay your debts. They're legally allowed to break into
your home, although there are strict rules about this.
Debt collectors are not court officials. They're professionals
who (guess what?) collect debts. They might have been hired by a
lender to collect the money, or the lender might have sold them
the debt. Either way, they have to follow the same rules as the
original lender.
Myth #5 "I can't get credit. I've been blacklisted!"
There's no such thing as a `blacklist' in the UK, but whenever
you apply for credit, the lender will normally check your credit
report. Telling them how much you already owe, how you pay your
bills and so on, your report helps them assess the risk of
lending to you. It doesn't tell them whether or not they should
lend you money – that's their decision.
Be aware that whenever you apply for credit, the lender has the
right to see your report. If you don't keep your finances in
good shape, you could find it harder, and / or more expensive,
to get credit.
About The Author: Melanie Taylor is associated with Gregory
Pennington. For more information about debt management, debt
advice, Individual Voluntary Arrangements (IVAs), basic bank
accounts with a debit card facility, loans and remortgages,
please visit http://www.gregorypennington
