Debt is not always bad. Borrowing money can be useful for a number of things – such as buying a home, covering an unexpected bill or buying a new car. It only becomes a bad debt if you think you might struggle to pay it back – and even then, there are things you can do to help.
Here we’ll look at some of the different types of debt, and what can turn them into bad debts.
Credit Card Debt
These days, credit cards are an essential financial tool for many people. Used correctly, they can help you out of a tight spot, and you won’t pay a penny of interest as long as you repay the balance on time.
However, credit card debts can be bad if you’re not sure when you’ll be able to pay it all back. Interest rates tend to be much higher than most other types of credit, meaning if it’s not repaid in good time you could end up paying a lot more than you bargained for.
A mortgage is probably the biggest debt you’ll ever take on, but it’s necessary for almost anyone who wants to buy their own home. In a sense, a mortgage is safer than some other types of debt, because if you can’t afford your payments you can always sell your home to cover it.
However, a mortgage debt can become a bad debt in a number of ways. One is if you’ve over-committed yourself and you’re struggling to meet your payments. Another is if your house falls in value and you’re left in ‘negative equity’ (meaning your home is worth less than your mortgage). This could make it very difficult to remortgage or move home unless you increase your deposit.
Do you nearly always find yourself in your overdraft at the end of the month – or worse still, are you overdrawn even after you’ve been paid? If so, it may indicate a serious financial problem.
Unauthorized overdrafts usually carry very expensive charges, and even agreed overdrafts charge about the same as a credit card – so if you go overdrawn, it’s important to try and get out of it as soon as you can.
Dealing with Bad Debt
If you’re worried about debt, it’s important that you don’t hesitate to get the problem sorted out.
If the problem is that you feel you have too many debts, but you can still afford your payments, one option may be a debt consolidation loan. This makes your finances simpler by rolling all your debts into one and could even reduce the amount you pay each month. However, it’s not suitable for serious debt problems.
If you really can’t afford your repayments, you should contact your lenders to explain the situation. All lenders have dealt with people in your situation before, and may be happy to temporarily reduce or freeze your payments while you get your finances in order.
If your problem is more serious and you don’t think you’ll ever be able to repay your debts as agreed, you should find out what debt help is available as soon as possible. For example, a debt management plan enables you to repay your debts more slowly, reducing the amount you pay each month.
There are many more options for tackling debt, and the right one for you will depend on your circumstances – so always get help from an expert debt adviser before you decide on anything.