This year’s Debt Awareness Week (20 to 26 March) is focused on how easy it is for debt to happen to anyone. With the UK in the grips of a cost of living crisis, with inflation high and the cost of borrowing rising, this message is more important than ever.
While the debt itself might not be a problem, poorly managed or hidden debt can become all-consuming, affecting our financial futures and our mental health.
Keep reading for a look at how and why debt issues could affect us all, and how financial planning – and open and honest communication – can help all those managing debt.
The cost of living crisis is causing debt worries for millions
Back in August 2022, the Financial Times confirmed that UK credit card borrowing increased at its fastest rate in 17 years.
At this point in the cost of living crisis, inflation had topped 10% – reaching double figures for the first time since 1982 – and the Bank of England (BoE) base rate sat at 1.75%.
To combat a soaring cost of living and rising borrowing costs, consumers turned to credit cards.
The annual rate of credit card borrowing jumped 13% in July 2022 compared to the previous year. This marked the biggest rise since 2005.
Buy-to-let landlords and high earners could be among those struggling
As the disastrous mini-Budget saw mortgage rates rise, soaring energy bills and below-inflation wage growth caused many to increase the size of their debt.
This perfect storm has meant an increase in debt among groups who may have previously been unused to financial difficulty.
Rising mortgage rates combined with changes to EPC regulations and tax changes have created huge problems for buy-to-let landlords, for example. In fact, the Guardian reports that landlords sold 35,000 more properties than they bought in 2022.
Professional Adviser reports that frozen tax allowances and falling thresholds are likely to see 1.5 million people creep into a higher tax bracket by 2027. Around 300,000 of these will become additional-rate taxpayers, thanks in part to Jeremy Hunt’s decision to reduce the earnings at which the additional rate kicks in.
Thankfully, there are some simple steps you can take to better manage your budget.
3 simple steps to help keep your debt under control
1. Use simple household budgeting techniques
Try using a simple spreadsheet to track your monthly income and expenditure and pinpoint areas where savings can be made.
Split your outgoings into three categories: needs, wants, and future savings. Then use the “50/30/20 rule” to allocate your monthly income funds as follows:
- 50% to “needs” like household bills, food, and your mortgage
- 30% to non-essential “wants”, like holiday funds, theatre trips, and meals out
- 20% to savings, pensions or investments.
Be sure to put the 20% aside for your future first. That will mean you can budget with the rest while knowing that your future self will be looked after.
2. Target your high-interest debt first
The different types of debt you hold will have different interest rates attached. With credit card debt rising, it’s worth noting that this could be one of the higher-interest debts you hold. Ideally, target this.
Paying large amounts of interest on debt can significantly decrease your disposable income and affect your ability to pay off lower-interest debt like a mortgage.
Consider transferring your credit card balance to a 0% deal with another card provider and set money aside to ensure the debt is paid while the 0% interest deal remains. You might also think about switching your mortgage to reduce repayments.
Before you consider applying for any type of loan or credit card, it’s very important to check and understand your credit score and credit report.
While many providers allow consumers to check their eligibility for credit using only a “soft search” (one that doesn’t affect your credit score and cannot be seen by lenders), you’ll also have a “hard search” applied when making a full application.
Hard searches are visible to lenders and multiple hard searches could affect your credit score, so tread carefully before proceeding with credit applications. Consider discussing your circumstances with lenders before you make any decision.
3. Make full use of your tax-efficient allowances
Savings and investment vehicles like your pension and ISAs are incredibly tax-efficient.
Your pension contributions receive tax relief at the basic rate – and you can claim further relief as a higher- or additional-rate taxpayer. This applies up to the Annual Allowance of £60,000 (or 100% of your pensionable earnings, if lower) for the 2023/24 tax year. This is an increase from £40,000 in 2022/23, as announced in Jeremy Hunt’s spring Budget.
Any interest you earn in your Cash ISA is tax-free, while the gains you make in a Stocks and Shares ISA are free of Income Tax and Capital Gains Tax (CGT). Top-up your ISAs to the £20,000 ISA Allowance (if you can afford to) to make sure you take full advantage of the products’ tax efficiencies.
Honest and open communication is key to managing your debt effectively
Last September, you might have read our blog Why the post-text generation holds the key to talking about money, in which we confirmed that 9 out of 10 Brits find it hard to talk about their finances. That’s a massive 47 million of us.
Money remains the biggest cause of arguments within couples, with perceived overspending as the main issue.
Talking openly and honestly about your finances – especially where debt is concerned – is key. Trying to hide debt, or manage it alone, can be damaging to your mental health so be sure to speak up.
You can contact your bank, mortgage provider or credit card company to work out affordable repayment plans. Or speak to loved ones.
Get in touch
It isn’t always easy to talk about money issues or debt so why not make this Debt Awareness Week the time that you try to break the taboo?
And if you need any help managing your household budget or you want to be sure that your long-term plans are still on track, speak to us now. Get in touch and find out how our team of expert planners can help.