The truths I am learning about controlling Debts

It is year X and you owe Family 119 a loan.. Knowing that you are unable to pay back, you pledge your services and that of your entire family of 5 to repaying this debt. Family 119 agrees to this arrangement but will not tell you what type of service you will provide and for how long.

You are now age 73 and frail. The 119s now own your land, where your modest home sits (you are now a tenant) and they are also aware that you can no longer continue your services. You instruct your children to inherit your debt repayment services to the 119s. What will they do?

Luckily, Debt Bondage, as described above is illegal according to the International Labour Organisation but it provides some historical insight into how debts have been managed in the past.

Today, the 119s seem to be replaced with banks and other lending organisations. Additionally in some parts of the world, your debts can still be passed onto your dependents.

Unsurprisingly, Debt is about affordability. Can you afford to have Debt?

So, what is your debt relationship status? Friend, it's complicated, separated?

In the UK, research by FairMoney found that typically, women own 25%  more debt that men. This reality is taking place in a world where a woman wage is statistically lower than men due to wage gaps and the increased number of women in part time jobs. One positive news is that women are more likely to speak about their debts than men showing that we have less guilt or shame about this subject.

With an open approach to discussing debt, this blog post looks at, what we can do to reshape a women's debt reality. I seek to understand the nature of debt, what it is and how to manage it to yield positive outcomes. And if you are already in a difficult debt situation, I share some views based on research on how to get address it.

Credit Card is a type of unsecured debt

Debt is a sum of money that is owed or due to a lender. 

There are two types of debts - Secured Debt and Unsecured Debt.

Secured Debts are backed by an asset. This means that when you take on a secured debt, the lender (who is providing you with the loan) has the right to asset e.g. a car or house upon as collateral. The typical types of secured debts are mortgages and car loans. If you are unable to pay the loan taken to obtain these assets, the lender can get the asset also called a collateral. As a borrower, you are able to own the asset only when you pay off the loan in full.

Unsecured Debt are not backed by an asset and the lender does not have rights to any collateral. These debts typically have a higher interest rate and examples of this type of debts are credit card loans, student loans, medical bills, pay day loans, overdrafts etc. If you obtain one of these types of debts, the lender can get repaid if your default in a number of ways- garnish your wages, send a debt collector to retrieve the funds or find a way to get access to your asset.

The Stats
Across the Britain, Unsecured debts have increased by 50% since 2008 and make up around 30% of a typical household income. Why? these increases are attributed to public spending cuts and wage stagnation. In light of this, individuals are using debts a resource to manage their expenses. Unsecured debts are easier to access (online) and loan providers are able to typically charge higher rates and thus reap significant rewards particularly when borrowers are unable to repay them. ​​

Wealth builders handle debt with extreme care

Understanding Debt for Wealth Creation, Growth and Protection

From my research, I have found that people hold debt for a variety of reasons, to purchase phyiscal assets, knowlegde assets such as education via a student loan, to deal with sudden changes, build their credit score and more. Some others choose to have ZERO debts and manage their lifestyle with their own savings.

However, most wealth builders handle debt with extreme care. This is because:
​

• If it is too high incomparision to their income, it does not free up funds to make additional investments
• It impacts their wellbeing. A debt free life is a stress free life​
• It can impact their credit score- a representation of their ability to pay back a loan. If you have a low credit score, lenders including banks will likely charge you high interest rates to lend to you or will choose not to provide you a loan. You can check your credit score for free or for a fee using services like Experian, Equifax, Noodle or the Information Commissioner office. 

For each debt type, I share my finding what what a good behaviour looks like and also list out which bad ones to avoid.

We hold debts for a variety of reasons

Credit Card

Bad Debt Habit:  

• Spend beyond what you can afford.  
• Take cash out of your credit card
  
• Pay only the minimum amount- this means you'll pay more than you borrowed e.g. If you borrowed 50, you can pay back 150 depending on the interest rate per lender.

Wealth building habit:  

• For each amount you spend on your credit card, clear it (pay it back in full) every month. 
• Get a credit card with low or zero interest rate payments 
• Have only 1 credit card that rewards you for spending (if possible) 

Car loan
Bad Debt Habit:   

• Buy a brand new car beyond your means and pay a large proportion of your income to pay back the loan

Wealth building habit:  

• Buy a second hand car and pay in full using cash which you have saved this way you also avoid making monthly payment.
• Use public transport, Walk, get a bike (if possible) 

Mortgage
Bad Debt Habit:

• You purchased  your home and you cannot meet the monthly payments. 

Wealth building habit:  

• Have an emergency fund that covers around 3-8 months of expenses before purchasing a home 
• Make sure the monthly payment is equal to or less than 30% of your monthly income.  
• Make monthly or annual overpayments to reduce the amount of interest you pay and your mortgage term.
• Rent out spare room(s) to supplement your mortgage payment

Student loan
On average, It takes women 16 years to pay off student debts. By contrast, it takes men 11 years.​
Bad Debt Habit:

• Get a high student loan that will take more than X number of years to pay. 

Wealth building habit:  

• Go to a significantly cheaper university 
• Take out low cost loans so you can start your career with very low debts.

I am thinking of taking on (more) debts
(Discuss this in DETAIL with your loan provider )

• Seek low interest rate debts
• Ask for ability to pay it off early with minimal penalties
• Make debt repayment less than 20% of your monthly income
• Use comparison sites to consider all suppliers - family, friends, government, banks
• AVOID pay day loans (see more below)
• Do not take on debts for things that do not grow in value (e.g. a TV)
• Find out what happens if you default​

I am already in debt
Not to worry, you have multiple resources avaliable to you to acheive a postive outcome. Speak to your bank or financial advisers to get more information. You can consult resources and charities that include:

• Money Advice Service
• Citizens Advice
• Money Advice Trust

​Here are a few steps that may help:

• Create a debt payment plan
• Speak to the lender to reduce the interest rates and repayment amount(s)
• Use the snowball method (pay off the smallest debt first)
• Reach out to debt management charities (see above)
• Overpay when possible
• Stay positive

Whatever you choose, DO NOT Use Pay day Loans
Payday loans refer to loans provided by pay day lenders who lend an amount of money which borrowers typically pay back on the day they receive their monthly salary-hence the word pay day. These loans are typically  sought after as a last resort. Due to this, they typically carry very very high interest rates. These loans are unsecured and can negatively impact your credit score because they signify to the lender that you are not financially stable. This can  make it more difficult for you to get other loans e.g. a mortgage in the future.