Avoid debt

There are some really simple ways to avoid falling into debt. Here are a few of our top ten tips:

1. Work out a budget

One of the best ways to avoid debt is to sit down and work out how much money you have coming in, how much must go out each month to cover your bills, and how much you have left for general spending money. When you know this, it’s much easier to work out whether or not you can afford certain things, or whether you need to save up, or say no to some purchases.

The government backed website – Money Advice Service – has a great budget planner which you can use to help you plan your spending.

If, after working out your budget, you’re still finding you are stretched, look for any ways you can make any cutbacks and make sure you’re getting all the money you’re entitled to. again the government backed website – Money Advice Service – has a great cut-back calculator which may help to identify ways you can cut back on what you spend.

2. Make sure you are claiming all the benefits you are entitled to

If you earn a low income, make sure you are claiming all the benefits and tax credits you can. Find out more.

3. Make sure you are not paying too much for things

From changing your gas and electicity providers, to getting cheaper life insurance and home insurance, there are lots of ways you can cut back on the bills you pay, leaving you with more money for extras. The government backed website – Money Saving Advice – has lots of top tips on how to save money on your bills.

You may also be able to reduce your rent, mortgage payments, or get help to repair your home, which could help.

4. Put your ‘spending money’ on a prepaid card

If you are struggling to make ends meet, and you are the type of person who is regularly tempted to spend too much, why not have your monthly spending money loaded onto a pre-paid card? Prepaid cards work by loading money onto them from your bank account, and then you can only spend as much as you’ve put onto the card. If you only carry this around with you when you are out shopping, once the money’s gone, you can’t spend any more.

There are some pitfalls with prepaid cards that you need to be aware of. For example, you can’t always use all cards everywhere, but if you choose a card that has a VISA logo on it you are more likely to able to use it very widely. You also can’t pay for petrol or a hire a car with prepaid cards.

Visit the Which website for advice and guidance on which prepaid card to choose.

5. Consider setting up a basic bank account

Another really good way to stop overspending is to move to a basic bank account for all your day to day spending. Basic accounts still offer debit cards, so you can use them when you are out and about shopping.

Whilst basic accounts do offer the option to pay bills by direct debit and standing order, because they don’t offer an overdraft facility, if you overspend before your bills go out, your bill payments may be rejected if you don’t have enough money in your account.

That’s why it’s often a better idea to pay your salary into your current account where all your monthly bills are paid from, and then transfer your spending money for general and food shopping etc (as detailed in your budget) into a basic bank account.  Then if you only carry around a payment card for your basic bank, once your money is gone, it’s gone and you won’t be tempted to overspend.

That said, if you do have very limited spending money, work out how much you need to reserve each week for essentials, such as food and healthcare products, and make sure you don’t spend all you money in one go and leave yourself with nothing for essentials

If you are considering a basic bank account, we would advise you to shop around. There is no need to pay for a basic bank account – most of the major banks and building societies offer one for free. That said, if you search online, you’ll see some basic bank accounts on offer from companies that aren’t high street banks or building societies. If you open an account with one of these companies, they may try to sell you a money management service, where you pay a fee for someone to advise you on managing your account. Also be aware that some basic bank accounts also don’t allow you to withdraw or pay in money at different banks. Some also don’t offer a cheque book.

To find the right basic bank account for you, use a comparison website such as Moneyfacts and compare the features of each product.

6. Limit the amount of credit cards you have, or get rid of them if you can

Having more than one credit card can be dangerous. The more cards you have, the more you can spend. Each card has a credit limit and there is nothing to stop you spending up to the limit on each card.

A great way to stop this happening is to consolidate your credit card debts onto one card. Money Saving Expert lists the best balance transfer offers available. When you transfer your balances to one card, make sure you close down all your other accounts so that you don’t start to use them again!

You should aim to pay off all your credit card bills, and only keep credit cards for emergencies if you can. Alternatively if you prefer to pay for large items on credit cards, such as holidays or online transactions, once you have cleared your credit card debt, we recommend you set up a direct debit to pay off the entire balance of your credit card each month, so that way you can’t build up debt.

7. Set up an emergency fund

Instead of relying on credit cards, your overdraft or expensive loans in case of an emergency, why not set up an emergency fund?  An emergency fund is a great thing to have, in case a large unexpected bill hits you – your boiler breaks, or your car needs lots of repairs for example.

An emergency fund will also stop you having to borrow money, and as soon as you spend it, you can top it up again, in case you face any other emergencies. It sounds simple, but lots of people don’t have one, and then face expensive lending options. If you can, why not put your emergency fund in a separate savings account? This way, you won’t be tempted to spend it, and you’ll also earn more interest.

Here’s some top tips to set up an emergency fund:

  1. Decide how large you want your emergency fund to be
  2. Work out how much you can put into your emergency fund each month
  3. Open a savings account for your emergency fund – keep it separate from your current account and any other savings accounts you have
  4. Put aside money every pay period until you reach your goal

Only use your emergency fund for actual emergencies, e.g. if you become unemployed and need to pay for bills. Do not be tempted to use your emergency fund for other things, such as holidays or nice to haves.

8. Reduce your credit card limit

Another good thing to do is to ask your credit card company to reduce your credit limit to a manageable amount – for example, if you know you can afford to make monthly payments on £500 credit, but monthly payments on £1,000 would be too much for you to manage, get your limit dropped. This will remove temptation and help you to keep your spending within a manageable level.

9. Don’t disguise your wants as needs

It’s easy to convince yourself that you ‘need’ a new television or that you ‘need’ to go on holiday, but, if you are finding it tough to pay your bills each month, you really should be asking yourself whether you really need all  the things you want to buy.

Obviously you need food, shelter, clothing, and basic health and hygiene products. But even so, if you are finding your finances tight, can you cut back on the things you do buy. Can you switch premium food products for value food products, or could you consider shopping in a less expensive food store to help cut your bills and avoid temptation?

Things like the latest fashion labels, a luxury car, and expensive hair products, are not things you need, so if you are struggling, see what you can do to cut these out, or only buy them when you know you can afford them and all your bills as well. Smoking falls into this category, and if you can give smoking up, you could save thousands of pounds a year!

10. Only buy what you can afford and don’t just ‘put it on the credit card’!

It sounds simple, but don’t buy things on credit that you can’t really afford. If you can’t afford it, you’ll struggle to pay it back and also have to pay interest charges making what you have bought, even more expensive! You can avoid or cut down your credit card debt by only buying what you can actually afford to pay for.

Also, don’t withdraw cash on your credit card as it attracts several charges, as well as is’ own, higher interest rate, so avoid this unless absolutely necessary.

And …. don’t miss credit card payments

Missing credit card payments will result in you having to pay a late fee, as well as damaging your credit rating. If you need to, set up a debit to make the minimum payments each month, until you can pay off the balance.