Debt: Top Five Risky Myths
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.
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.com/.
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