Is the Good Life Leaving Bad Debt?

Is your debt holding you back?

From store cards to credit cards, it seems like very little is out of reach these days, as we can all buy now and pay later. It’s made for a booming few years, where we have been able to have all we want – from the latest fashions to the best holidays – on credit. 

But as interest rates rise along with the cost-of-living and rental debts reach an all time high, are we now paying the price for our lack of budgeting?

‘Good’ debt vs. ‘bad’ debt

Very few of us are able to move forward in life without some debt. A mortgage, for example, is considered a debt, but this is a ‘good’ debt, as it’s helping you build wealth for the future. 

What are other examples of ‘good’ debt?

• Student loans. Investing in your education usually leads to a more lucrative career, so while you will need to pay those loans back, that debt will pay off in the future!
• Business loans. Launching a new business could really pay off, giving you a much bigger return than you originally borrowed
• Mortgage. From your very first mortgage to later buy-to-lets, investing in property will almost always result in a profit. Even if you don’t invest in buy-to-lets, once you are on the ladder, you are usually able to level up to a bigger and better property later on and by getting great advice on remortgaging, you can save money later too
• Vehicle loan. Spreading the cost for a vehicle that will save you commuting money in the long run is also considered a ‘good’ debt – as long as you are sensible and don’t take out a huge loan to get a top-of-the-range car. Don’t forget that cars drop in value – after five years, your car will be worth only 65% of its original value

In contrast, ‘bad’ debt doesn’t increase your wealth over time. In fact, you could end up paying more than you originally borrowed in interest.

What are examples of bad debt:

• Unregulated loans. Payday loans wrack up huge amounts of interest, so should be avoided 
• Credit cards. Credit cards have their place, as they can help you build up your credit score and spread the cost on large purchases. They’re especially useful if you get one with a low interest rate or an interest free period. They also provide extra protection that debit cards don’t. However, if you’re using your credit card all the time and not managing the debt well, or getting multiple credit cards, you can very quickly find yourself sinking under a huge load of debt 
• Servicing other debts. If you’re borrowing money to pay off another debt, that’s a sure sign that you might be in trouble and should get some advice on clearing it
• Loan sharks. It goes without saying that going to a loan shark is not only bad debt, but dangerous too

What are the basics of budgeting?

Making sure that you’re not spending beyond your means is key. Our Expense Tracker makes managing your money easy, as you can input your income and expenses and see a visual representation of your spending and adjust accordingly.

Many banking apps today have the option to ‘categorise’ your spending, so you can see where you’re spending the most and adjust if necessary.

Here are some key questions to help you get on top of your spending:

• What are your fixed expenses? These are expenses that don’t vary from month to month. This could include your rent or mortgage payments, your gym membership or your phone bill. However, expenses can always change – if your gym membership suddenly goes up, be sure to update your budget to reflect that
• What are your flexible expenses? These are bills that will vary each month, which can include your utilities or your food bill. While these are flexible, it’s a good idea to have a range in mind 
• What are your total outgoings? What is the combined total of your fixed and flexible expenses? When adding it all up, add the top end of your flexible spending
• What’s your total monthly income? This should include your monthly salary, if you have a day job, your income from your rentals and any other investments or side hustles you may have 
• What is your disposable income? Once you’ve subtracted your total outgoings from your total monthly income, what you have left is your disposable income

We don’t recommend that you spend every penny of your disposable income! Make sure there is always something left in your bank account at the end of the month, if possible. We also recommend that one of your fixed expenses is savings, as it’s always good to have a rainy day fund.

While budgeting takes away the instant high of buying straight away, it does mean you don’t have to worry about bad debt hanging around your neck.

Consider your credit score

Having a good credit score means you will be offered lower interest rates on loans and credit cards because lenders can see you are a reliable borrower. A poor credit score can also affect things like getting a new mobile phone contract.

You can check your credit score on various websites, but if yours has come back low, there are plenty of ways to improve it (some of which are so simple, you’ll be surprised!)

• Prove your address. Get on the electoral roll and you’ll be registered at that address. It only takes a few minutes to do this online. 
• Get some credit. It may feel counterintuitive if you’ve been living within your means, but if you have no credit history, your credit score could actually be on the lower end of the scale. Lenders need to see that you are capable of managing credit
• Build a credit history. This includes a phone contract, but it doesn’t hurt to use a credit card too. Just make sure you are making your repayments on time and in full every month – otherwise you will damage your credit rating
• Keep credit usage low. Try not to use your full limit – a lower credit utilisation is usually viewed positively by lenders, so try to keep it below 30%
• Check for mistakes. When you get your credit report, check every detail and make sure it’s all correct, with no typos. If you spot any errors, get them fixed immediately
• Show you’re a mature spender. Keep your old accounts open as it shows lenders you can manage them over a long period of time

When driving down your outgoings, be sure to look for ways to save money which you could put towards clearing any debts. This could be moving your properties to a free platform like Mashroom, spreading the cost of updates or remortgaging for a better rate.  

There is no bad time to get on top of your debt. It might feel easier to ignore it piling up, but as soon as you face it and take the time to make a plan of action, it will be a weight off your mind and will set you on a more successful path.

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