25 per cent or 1.49 per cent interest on your debt
LAST week we covered some of the psychology behind debt, and I'll just turn that into some practical ideas.
For sure, the best outcome for us all is that we are feeling in control of our lives rather than reacting. That gravitational pull of the ‘new' fangled shopping ‘thingy' cedes control to the advert man. Its better you have it.
On the road to financial freedom, step one is to face the fear. The unopened ugly brown envelopes with statements inside only add the stress. which is why they often remain … unopened.
In the book ‘Feel the Fear and Do It Anyway', Susan Jeffers states that it's not the outcome we fear, it's the potential for not being able to deal with the outcome.
The best strategies of overcoming any fears is to understand:
You are not alone. There are plenty of people with you and like you, all facing the same issues; importantly, the only way to deal with fear is to know fear exists all the time, is part of life, and to face it head on and be strong and become stronger with it.
Break the project down into pieces that are manageable. A big ugly problem is easily thrown in a cupboard.
Here are the thinking steps to eradicating debt:
:: Write down the problem, the amount, and the issue;
:: What is the worst that could happen if you start to deal with this problem? Write it down – all of the fears?
:: Can you handle those outcomes?
Now make the calls to start taking control. You will feel good about it, the second you tie your laces and move forward.
How to deal with credit cards:
:: A credit card company has a responsibility to deal with persistent debt i.e. debt that just seems to stick to you and the key periods are 18 months, 27 months and 36 months. They have to explain to you how to pay your debt off sooner and will potentially offer to lower interest rates and charges you are paying.
At 36 months they will offer you a four-year plan, and if you don't agree they will stop your card.
They have to be reasonable and must be aware you are not capable of paying the debt and by now most certainly will have frozen your interest rate.
Prior to all of this, it is better to take control. You will feel much better, and be in a superior position next time there is such a scenario.
Credit card debts are the worst. They were described many years ago to me as something you use, to buy something you don't need, with money you don't have.
I've seen interest rates from 22-50 per cent. Extraordinarily, the higher rates, are paid by those least likely to be able to pay it, the ultimate weapon of mass destruction.
Approach the card companies and see what you can do by asking them to freeze the interest or simply lower the rate if possible. We've had great success with that for customers but do it yourself, you'll feel better.
If you own your own home, consider adding the debt to your mortgage, to reduce the interest rate, then save and pay off early. It is common for people to think they will be paying the interest for the whole of the mortgage but that is incorrect.
Consider a debt of £40,000 on credit cards or loans.
Let's take an interest rate of 25 per cent on the outstanding credit card. Each year you need to make £10,000 interest payments per year just for the debt to stand still. After five years paying the interest, you would still have £40,000 debt.
You'll never repay it.
Alternatively, package all your debt together into a fixed rate mortgage for the next five years so you know what your payments are. The best rate (without catches) is 1.49 per cent at the moment.
Over five years, the £40,000 would have built up £596 per year which you pay. This saves you £9,404 per year on your credit card interest, which over the five years, is £47,020, so you can repay the loan in its entirety and have £7,020 left for yourself.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary review of your mortgage call Darren McKeever on 028 6863 2692, email email@example.com or visit www.wwfp.net.