When does debt become too much debt?


Recently we saw the total amount of personal debt within the UK drop for the first time in 16 years but recent research suggests that it is back on the rise with the average UK resident owing an estimated £8,400. This figure was a gross amount, i.e. it ignores other savings and investments that the individual possessed.

If you’ve read the best investing books available in the library, you will know that paying down debt is usually seen as ranking as a higher priority than investing. This is because escaping interest is effectively a ‘risk free return’, i.e. the interest saved is guaranteed. When you compare the risk free return available from saved interest, versus the uncertain possible return from an investment, you can see why this can be an attractive investment in comparison.

How is personal debt on the up when lending criteria is more stringent than it has been for years?

The answer to this could lie in the current state of the economy as the recent changes in taxation, the rising cost of living and the removal of certain benefits have all contributed to people’s personal finances being squeezed more than ever.

Any fall in the stock market will reduce the value of investments they have which are linked to it, this will reduce the ability of even wealthier households to use their investments to service their debt.

And if people are struggling to pay down existing debt, particularly on high interest credit cards, then this would explain how debt levels are rising with little or no extra borrowing as these types of debts can creep up month by month if payments are missed or only the minimum amount is paid.

When does debt become too much debt?

The obvious answer to this may be that debt becomes a problem when it can no longer be effectively serviced and it begins to get out of control.

However, recent research suggests that the point at which debt becomes a problem can be quantified and that borrowers have two thresholds when it comes to worrying about debt.

Findings from price comparison website moneysupermarket.com revealed that, although £8,400 is the national average, people only really start to worry about their personal debt levels when they owe more than £9,700.

Furthermore, borrowers are more likely to seek professional paid for debt advice when they owe out £19,000 or more, although almost half of those polled said they would never pay for debt advice.

These findings are supported by a separate study carried out by Scottish Provident who found that the average person only considers themselves to be in serious financial difficulty when their debt is in excess of £15,837.

What to do if you’re worried about debt and investments

There are a number of companies that offer paid for debt solutions but if you are struggling to make ends meet it may be the case that you simply do not have the money available to be able to pay for this service.

In addition, the major benefit of ‘paid for’ debt management is convenience, as most of the work that they do could be done by you, it just takes time, effort and organization.

So, provided you have the time and determination to tackle your debts, it is probably a better idea to contact one of the free debt counseling services available such as the National Debtline or the Consumer Credit Counseling Service

These services offer free and impartial advice and can best advise you on how to manage your debt given your particular circumstances. 

Please note that these services are not able to provide financial advice about investments you may hold, nor are online investing courses. You will need to see an independent financial advisor to deal with investment issues.

The next step will probably be to contact your creditors and work out a debt solution plan with them which could be anything from a temporary freeze on your interest and charges to a settlement figure, depending upon your circumstances.

Or if your debt has reached a certain level then an IVA or bankruptcy may be the only feasible solution. Either way, the most important thing when tackling debt is to act sooner rather than later as ignoring debt will only make the problem worse.





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