Debt is a huge problem in the UK. According to The Money Charity, in April 2021, the average total debt per UK household was £61,509, credit card debt per household came to £1,928, and people in the UK owed a staggering £1,717.4 billion.
Now it’s true that a lot of this debt will be responsibly managed and paid back – not all debt is dangerous, of course – but such a spectre can quickly turn into a cycle, ruining finances and futures for those caught up. Thankfully, there are lots of things you can do to avoid a debt cycle. Here’s what to do.
What is a debt cycle?
A debt cycle is when a person takes on debt so they can pay back previous debt. This is almost always unsustainable, as continual borrowing only increases the overall monthly expenses.
The consequences of getting caught in a debt cycle are severe. Servicing the debt means that you can’t channel your funds to important, productive things like family, property ownership, or your pension. This can have huge ramifications on your life, stopping you from doing the things you want to do.
Eventually, you may become unable to pay back the debt, leading to the need to declare bankruptcy and approach the lawyers helping clients struggling with debts to find out the solution to end this issue. You may need to sell your home and other possessions to pay back your creditors. And declaring yourself bankrupt can severely impact your credit rating, meaning you will be unable to borrow cheaply in the future, again impacting your life plans. Consult with a bankruptcy attorney to better understand the process of bankruptcy filing and its pros and cons. A bankruptcy attorney can help you file for bankruptcy and assist you through the ins and outs of the bankruptcy process.
The causes of debt cycles
Typically, debt cycles are caused by ‘bad debt’. This includes financial products like payday loans, high-interest credit cards, loans used to fund monthly expenses, many forms of loans for fair credit and borrowing that’s based on potential income. Due to the insecure and expensive nature of these forms of debt, they can quickly get out of hand.
How to avoid getting into a debt cycle
There are plenty of tactics to utilise if you want to avoid getting caught in a debt cycle.
- Try to use cash or a prepaid debit card to make discretionary purchases throughout the month. This will stop you from spending more than usual or being tempted to use a credit card.
- Understand your finances instead of shying away from them. By either writing down your spending and totting it up, using an app, or simply checking your bank balance regularly, you can understand what you can and can’t spend.
- Make a budget. Spelling out what you can spend and on what, a budget will help you save for large purchases like a house deposit, spend less on frivolous purchases, and pay back debts that you currently owe.
- Change your borrowing. By transferring debt balances onto interest-free forms of credit, you can give yourself more time to pay them back, and incur less interest. This can relieve pressure on your budget.
Escaping a cycle of debt can feel like an impossible task, but there are steps you can take to get back on track. One option is to take out a personal loan to consolidate debt. This can help by giving you one monthly payment at a lower interest rate, which can save you money over time.
Avoiding the debt cycle isn’t impossible. Have you got any tips on how to keep finances in the black? Let us know in the comments section.