Kia: Hey, it's Kia here. We've discussed how to keep your
Kia: credit healthy on the podcast, but today let's dive a
Kia: little bit deeper on debt. I want to find out
Kia: what you can do to manage it, strategies to reduce
Kia: debt, and how we can lessen the shame around it.
Kia: Welcome to another episode of A Little Bit Richer, brought
Kia: to you by my friends at Legal & General. Here to
Kia: help us tread the water is a friend of the
Kia: show, Andy Webb, the man behind the award- winning Be
Kia: Clever With Your Cash blog and host of the Cash
Kia: Chats podcast. Welcome back.
Andy Webb: Hey Kia.
Kia: So Andy, most of us have some debt and this
Kia: could take a number of forms. It could be credit
Kia: cards, personal car loans, overdrafts, mortgages, owing friends and family
Kia: members. I could go on forever. So let's start with
Kia: a common one. It's very easy to rack up debts
Kia: on credit cards. So can you give us some tips
Kia: to help?
Andy Webb: Yeah, I think with credit cards it's easy to assume
Andy Webb: that people know how they work, right? But when you
Andy Webb: are young, you're getting a credit card for the first
Andy Webb: time, you've just got this ability to spend money. So that's
Andy Webb: often where a lot of this kind of problems start. And
Andy Webb: it's only when you really fully understand it, you go, " Oh
Andy Webb: great. Actually I wish I hadn't done that when I
Andy Webb: was younger. I hadn't spent so much money." So the
Andy Webb: important things to remember here are do try and only
Andy Webb: use that credit card for your everyday spending, the things
Andy Webb: you can spend money on anyway. Don't get tempted to
Andy Webb: buy that extra thing. " Oh, I'll deal with it later
Andy Webb: on. I sort it out later," because if you don't
Andy Webb: sort it out when that statement comes through, then you're going
Andy Webb: to get charged interest and there might be fees as
Andy Webb: well if you miss payments, and that's where those debts
Andy Webb: start to rack up because not only are you getting
Andy Webb: charged interest on your purchase, then the next month if
Andy Webb: you don't clear it again, you'll get interest on that
Andy Webb: purchase, any new spending and interest on the interest. So
Andy Webb: it all really, really can add up. So try to
Andy Webb: avoid doing that. There is a simple thing you can
Andy Webb: do to make sure you don't forget to spend it
Andy Webb: and you do clear that full amount, and that's just setting
Andy Webb: up a direct debit from your current account to the
Andy Webb: credit card company, ideally for that full amount, and that
Andy Webb: means that it'll be cleared. But there is also a risk
Andy Webb: that comes with this a little bit and it's double
Andy Webb: spending. I don't know if you've had this before where
Andy Webb: so you've got something on a credit card, you know
Andy Webb: it's on there, but when you look at your current
Andy Webb: account balance, you see there's all this cash there and
Andy Webb: you don't really account for the fact that it has already been
Andy Webb: spent. So you spend it on other stuff and then the
Andy Webb: bill comes through, money's not there.
Kia: Yes, absolutely.
Andy Webb: So that's often where the problems start. So a little
Andy Webb: hack that I like to suggest to people is every
Andy Webb: time you spend on the credit card, or as soon
Andy Webb: as, maybe you might want to do it every week or
Andy Webb: something, but you transfer the money out of that current
Andy Webb: account into if you've got an account from Starling or
Andy Webb: Monzo, they have these pots and spaces, or maybe it
Andy Webb: can be a completely separate current account. You transfer the
Andy Webb: money over there so it's ring- fenced. You know when
Andy Webb: that bill comes through, you absolutely can afford it. And
Andy Webb: then you really understand actually what the balance on your
Andy Webb: current account is, that is actually what you've got. So those
Andy Webb: kind of things can help you stop it getting unmanageable
Andy Webb: and keeping on top of it.
Kia: I like the fact that you said just use it for everyday
Kia: spending because it reminds me of when I got my
Kia: first ever credit card at 20. Arguably I knew better,
Kia: didn't do better, and I applied for two credit cards,
Kia: Andy, £ 1, 000 limit each. Can you imagine that? And
Kia: even though I knew don't go crazy, it's not your
Kia: money, you can guess what I did. I went, I racked
Kia: up that money and I spent the whole 2000 on ... I
Kia: couldn't even tell you what I spent it on. I don't have proof of
Kia: what I spent it on. I don't have anything to
Kia: show for it. But that was a very expensive lesson
Kia: on how to actually use credit cards properly. So it's
Kia: having a plan for paying it back. It is understanding
Kia: the compounding of interest that can happen so you end
Kia: up paying more than what you initially borrowed. So I'm
Kia: glad that you covered that. But I also want to touch
Kia: on another line of credit that is getting very popular
Kia: now and that's Buy Now, Pay Later. I think that
Kia: is something that's boomed in the last couple of years
Kia: and is very much so accessible, and I see a
Kia: lot of young people especially leaning into that. So can
Kia: you give us a bit more insight into Buy Now,
Kia: Pay Later as well?
Andy Webb: Yeah, I mean it's huge, isn't it? And every time
Andy Webb: you go to a checkout it's there and sometimes they
Andy Webb: push you towards it a little bit, use this one over
Andy Webb: some of the other options. And a lot of the big
Andy Webb: companies now, there's cards. So you can Buy Now, Pay
Andy Webb: Later everything. It doesn't just have to be online. And
Andy Webb: for those, I mean everyone knows this, but this is
Andy Webb: where you split your payment into. It varies by provider
Andy Webb: and a lot of the time the shorter ones are interest
Andy Webb: free, which is no bad thing if you need to
Andy Webb: spread the cost of something out of a short space
Andy Webb: of time, because it helps you with those bigger expenses.
Andy Webb: But a lot of the time when they're longer than say
Andy Webb: three months, then interest gets charged on that. Not everyone's
Andy Webb: always aware of that. But I think the big danger
Andy Webb: with Buy Now, Pay Later is getting carried away, a
Andy Webb: bit like you talked about just now with those credit
Andy Webb: cards, originally you're spending here, you're spending there. One thing
Andy Webb: on Buy Now, Pay Later, it doesn't matter because I get paid in
Andy Webb: two weeks time and then I have enough to cover it. But
Andy Webb: then you put something else on Buy Now, Pay Later
Andy Webb: and something else on Buy Now, Pay Later. And you
Andy Webb: end up with this cycle of stuff that next time
Andy Webb: you want to buy something, you don't have the money
Andy Webb: to pay for it because you're still paying off the
Andy Webb: stuff on Buy Now, Pay Later from the previous month
Andy Webb: and you get caught in this kind of circle. And
Andy Webb: if your situation changes, you lose your job maybe potentially
Andy Webb: something like that or a big emergency kind of cost comes
Andy Webb: along so you don't have the cash even to cover
Andy Webb: the ones you thought you could cover, well you're committed
Andy Webb: to it and you're committed to 10, 20 of these. That's
Andy Webb: how prevalent they are, and you can get on anything.
Andy Webb: So again, it's coming back to what we said on
Andy Webb: credit cards, and this is true really for any kind
Andy Webb: of credit, it's only using it for stuff that you
Andy Webb: know if you can't afford it right now, you know
Andy Webb: that when you get paid next that you will have
Andy Webb: the money to cover that and it is for stuff
Andy Webb: that you need. It's not just luxuries and stuff. If
Andy Webb: you want a luxury, save up for it is the
Andy Webb: best way of doing it. I know in practice that
Andy Webb: doesn't always work but it's something to try and aim
Andy Webb: for at least.
Kia: Absolutely. And I want to touch on something you just mentioned
Kia: there, and it's talking about uncontrollable debt or out of
Kia: control debt. So how would you define a debt that
Kia: is unmanageable or out of control?
Andy Webb: Yeah. I think there are a few kind of warning
Andy Webb: signs out there that people should be keeping an eye
Andy Webb: for. And this is if you are regularly late with
Andy Webb: your bills, not because of mismanagement and forgetting to do
Andy Webb: it. It's because you don't have the money coming through
Andy Webb: until. I need to waiting up a couple of weeks,
Andy Webb: then I can pay it. Or the next stage of
Andy Webb: that is you're having to borrow money to cover other
Andy Webb: already borrowed money, so you get new debt to cover
Andy Webb: debt. Again, they're all kind of sign of things that,
Andy Webb: yes, you might be able to fix it just by
Andy Webb: changing how you budget, but it might be a sign
Andy Webb: of like these are going to get out of control. So
Andy Webb: they're kind of important things to look for there. Also
Andy Webb: things like paying for essentials with any kind of borrowing.
Andy Webb: So whether that is your supermarket shopping on a credit
Andy Webb: card or even Buy Now, Pay Later, you can get
Andy Webb: your groceries on Buy Now, Pay Later if that is
Andy Webb: something which is a regular occurrence. And the reason for
Andy Webb: that is because your other debts are eating up all
Andy Webb: your money. Again, that's a sign, look, you need to
Andy Webb: do something about those other debts if you aren't already.
Andy Webb: And there's also not just money aspects you need to
Andy Webb: be aware of that debts could be a problem. There's a psychological aspect
Andy Webb: as well. If you are losing sleep because you're worried
Andy Webb: about the debts, if you are avoiding opening up the
Andy Webb: post or the email or whatever it might be, because
Andy Webb: you know what's in there isn't good, then again that's
Andy Webb: a sign that you need to do something because that's
Andy Webb: going to have an impact on your mental health.
Kia: Absolutely. For anyone who has debt and they feel like
Kia: it's starting to become a problem, where should they start?
Kia: Because I know some people might have, I might have
Kia: two credit cards, I might have an overdraft, I might have
Kia: a loan. And it just feels like they are almost
Kia: drowning in their debts. So where should they start and is there
Kia: a way of prioritizing debts? Is there one that they should
Kia: be focusing over another? What does that look like?
Andy Webb: Yeah, absolutely. I mean there's a few things here. So
Andy Webb: first of all there's the difference between good debt and
Andy Webb: bad debt. And it sounds weird to say there's good
Andy Webb: debt, right? But without credit, without borrowing, then who's going
Andy Webb: to buy a house?
Kia: It's true.
Andy Webb: Right? Some people, there could be some people out there,
Andy Webb: but most of us, if we want a house, we
Andy Webb: need a mortgage which is debt, but that's good debt.
Andy Webb: But you could say the same about if you need a
Andy Webb: car to get to work and you need to have
Andy Webb: a car on finance, then again that can be seen
Andy Webb: as a good debt in that sense because by having
Andy Webb: that debt you are able to earn money.
Kia: Exactly.
Andy Webb: Careful not to get upsold.
Kia: Yes.
Andy Webb: And add the alloys and all the extra bits like that, but again that
Andy Webb: kind of thing can be a good debt. And then
Andy Webb: within the rest of the debts as well you're looking
Andy Webb: at, they're not all equal. You might find some are scarier.
Andy Webb: You might get some scarier letters from the people saying
Andy Webb: you owe us this amount of money and things, but
Andy Webb: ultimately there are some which if you don't act on
Andy Webb: them, their consequences could be pretty dramatic. And these are
Andy Webb: known as priority debts. There are a few of them,
Andy Webb: but the key ones here are your mortgage or your
Andy Webb: rent. So if you don't pay your mortgage, you don't
Andy Webb: pay your rent, ultimately you could lose your home, you could
Andy Webb: be out in the streets. So you have to make
Andy Webb: sure that is covered before a credit card, before a
Andy Webb: loan, anything like that. Your gas and electricity, you could
Andy Webb: be cut off if you don't pay that. So again,
Andy Webb: you need to make sure, even if it's not making
Andy Webb: their payment every single month, it's at least having a
Andy Webb: conversation with them because they might be able to help
Andy Webb: you with other repayments, but again, you can't just ignore
Andy Webb: that because the consequences, you could absolutely argue now that
Andy Webb: mobile and broadband are a priority debts because how many
Andy Webb: of us are working at home, right?
Kia: Exactly.
Andy Webb: You lose your internet, you can't work. Again, you can lose
Andy Webb: your job if you can't do that. So again, you
Andy Webb: want to make sure that these things are covered. And
Andy Webb: there are others, but a couple of important ones to
Andy Webb: mention here are council tax and TV license. These ones
Andy Webb: might not feel so important, but if you don't pay
Andy Webb: them and you haven't spoken to the council about the
Andy Webb: situation, then you could be taken to court. And then
Andy Webb: you get a fine. Now if you can't pay your
Andy Webb: council tax bill because you haven't got any money, how are
Andy Webb: you going to pay the fine?
Kia: Exactly.
Andy Webb: And ultimately the consequence down the line is you could
Andy Webb: go to jail for that. So obviously that's a priority
Andy Webb: again with the others. So they're the ones to really
Andy Webb: focus on first of all before the other debts. And
Andy Webb: the other ones, you can have conversations with those creditors,
Andy Webb: creditors basically with people that you owe money to, and they might
Andy Webb: come up with a plan or some kind of way
Andy Webb: of you kind of like, " Okay, look, we'll give you
Andy Webb: a breathing space maybe," which is where you have a
Andy Webb: space of time where no interest is added on, or
Andy Webb: you might be able to just pay the minimum on them. I guess
Andy Webb: it can be quite expensive and that can be quite scary
Andy Webb: because it's getting more and more expensive. They're the ones with a high
Andy Webb: interest. But that's the worst that's going to happen. Right?
Andy Webb: At least you'll still have a warm home if you
Andy Webb: focus on the others.
Kia: Yes. I think the thing I love most about what you've said there
Kia: is just having that conversation. I think it can get
Kia: very overwhelming very quickly if you have a lot of
Kia: debts. And like you said, those letters when they come through
Kia: the door, it can feel like, " Oh my gosh, everything's
Kia: falling on top of me." But if you are struggling
Kia: and you haven't told your creditors, they're not going to
Kia: know, they're not mind readers. They can't just say, " Oh
Kia: this person's struggling, I'm going to put them on payment
Kia: plan," if you haven't asked for that. So it is making
Kia: that priority, which I really love that you touched on.
Kia: When debt becomes unmanageable, what are some strategies that you'd
Kia: recommend to clear debt?
Andy Webb: First of all, have you got any savings? Because this
Andy Webb: is the kind of thing, a weird thing. If I've got debt, why
Andy Webb: would I have savings? But it's actually quite common that
Andy Webb: people build up an emergency fund because they feel comfortable
Andy Webb: having that pot of cash there if an emergency happens.
Andy Webb: But the problem is, if you're getting any interest on
Andy Webb: that savings account, the rate is going to be way,
Andy Webb: way, way lower than what you be paying on those
Andy Webb: debts. So you're much better off using those savings to
Andy Webb: wipe out as much of those debts as you possibly can.
Andy Webb: If an emergency comes along later on and that's a
Andy Webb: big if, but if it does, you might have to
Andy Webb: borrow it for that. But we can deal with that later
Andy Webb: on, and it's not going to be any more expensive
Andy Webb: of what you're paying right now. So that's the first
Andy Webb: thing to do. I mean obvious things about if you
Andy Webb: haven't already, just trying to find that budgeting, that extra
Andy Webb: bit of money that you've got anywhere that can go
Andy Webb: towards those debts rather than other things or potentially trying
Andy Webb: to make a bit more cash. It's extra shifts, second
Andy Webb: job, selling things, anything to get some more money in
Andy Webb: that you can do. I mean that's all quite obvious
Andy Webb: stuff but it's worth just mentioning it again. You can
Andy Webb: also try getting as much of those debts to 0% as
Andy Webb: you can. Credit cards are the big one here, 0% finance,
Andy Webb: but there are also 0% overdrafts. That just means that you aren't
Andy Webb: getting charged any interest on that debt or at least some of
Andy Webb: that debt, which means you can put more money into
Andy Webb: clearing down faster. Even looking at getting a lower APR,
Andy Webb: which is like the interest rates potentially a better way of
Andy Webb: reducing the rates not to zero, but at least it's
Andy Webb: going to be lower cost. But do look into that, particularly with things
Andy Webb: like consolidation loans, they're not always great. So just research
Andy Webb: those a little bit. Let's assume you've done all of
Andy Webb: that but you've still got some debts left over, multiple
Andy Webb: debts. There are a couple of strategies that are pretty
Andy Webb: popular that are worth thinking about and they've got weird
Andy Webb: names. So there's avalanche and there's snowballing. So avalanching is technically,
Andy Webb: mathematically is the best approach to go for because it
Andy Webb: means ultimately you are going to pay less interest, it's
Andy Webb: going to cost you less money. And this is where
Andy Webb: you target as much of your money as you possibly
Andy Webb: can on the most expensive debt, the one that has
Andy Webb: the highest rate of interest and all the others, you
Andy Webb: just go down to the minimum. And the idea is
Andy Webb: you clear that one as fast as you can and then move
Andy Webb: to the next one with the next highest rate of
Andy Webb: interest. Okay, so mathematically you do that, you'll be charged
Andy Webb: as interest. But what a lot of people find more
Andy Webb: motivating is snowballing, and this is where you focus on
Andy Webb: the smallest debt first of all because that's more achievable, right?
Kia: Mm- hmm.
Andy Webb: So you've got six debts say. You get rid of
Andy Webb: one, then you've only got five. And that's for a lot
Andy Webb: of people that makes them think, " Right-
Kia: Keeps you motivation to keep going.
Andy Webb: Yeah. And it's called snowballing because basically you've got rid
Andy Webb: of one and the next time you move on, the next
Andy Webb: one's big one, and end up with just basically one
Andy Webb: debt at the end and hopefully you get rid of
Andy Webb: that and then you're debt free. So they're both two
Andy Webb: things to consider if you're doing this yourself.
Kia: So if someone is struggling, where can they go and
Kia: what can they do?
Andy Webb: Okay. So if you are struggling and you don't think
Andy Webb: you can do this on your own, because a lot
Andy Webb: of this stuff might come down to some intense budgeting.
Andy Webb: We're just looking about where your money could be better
Andy Webb: spent. I'm sure a lot of people in this situation, they've
Andy Webb: already done that, but it's worth having a look again.
Andy Webb: Then there are some places you can go to who
Andy Webb: will either guide you through that or take you through
Andy Webb: some of the next steps. And we won't go into detail
Andy Webb: on the next steps here because there's too much to
Andy Webb: talk about, but there's things like debt relief orders, potentially
Andy Webb: bankruptcy, IVOs, which is individual voluntary agreement, these kind of
Andy Webb: things. They can take you through them and help you
Andy Webb: know what's going to be the best for you. Now it's
Andy Webb: very easy to think, " I'll just go on google," right?
Kia: Mm- hmm.
Andy Webb: " I'll type in debt support or debt help." And
Andy Webb: that is one of the worst things you can do
Andy Webb: because the people right at the top, they've paid for
Andy Webb: their result to be the top of the results, and
Andy Webb: often they're really cheeky and they'll have their names really
Andy Webb: similar to some of the good guys, which we'll come
Andy Webb: to in a minute. But what they're going to do,
Andy Webb: these companies, is they are doing this for profit. And
Andy Webb: I'm sure not all of them, but a lot of
Andy Webb: them will steer you towards a solution which makes them
Andy Webb: money, not necessarily what's best for you. So don't do
Andy Webb: that. Instead, I would go to Money Helper, which is
Andy Webb: the government's kind of finance website. And they've got a
Andy Webb: debt location tool they call it, right? Snappily title, but
Andy Webb: anyway, that's what it's called. And you put your postcode
Andy Webb: in and they will come up with a list of
Andy Webb: either face- to- face place if you want to go
Andy Webb: and chat to someone face- to- face or if you
Andy Webb: want to get on the phone or do a web chat,
Andy Webb: a list of people you can talk to where it's
Andy Webb: free, independent and impartial advice. So they won't judge you,
Andy Webb: they'll just take you through the steps. Some of the
Andy Webb: big names there, Citizens Advice, National Debt Line, Step Change,
Andy Webb: Christians Against Poverty, there are a number out there who
Andy Webb: will help you, but I would go to that Money Helper website
Andy Webb: first of all, and they will direct you into the
Andy Webb: places for more advanced help if you feel you need it.
Kia: Absolutely, and I'm glad you said that because I've seen, especially
Kia: on social media, I've seen a lot of ads where they say, " Come
Kia: and we can help you resolve all your debts." So it
Kia: is having your wits about you and make sure you
Kia: go into the right places. But you've shared where people
Kia: can go. However, we know, you and I know, we
Kia: do this as our jobs, that money is a taboo
Kia: and debt even more so, is something that people really
Kia: do feel ashamed about. So what can people do? Do you
Kia: have some suggestions to make it easier for yourself or
Kia: someone who has a friend or family member who is
Kia: struggling to open that communication around debt?
Andy Webb: Yeah, it's really hard, isn't it? Like you said, money
Andy Webb: is taboo and often people won't talk about any of
Andy Webb: it, but particularly when it comes to debt, that kind
Andy Webb: of element of shame can come into play. I think
Andy Webb: just sitting there on your own suffering in silence is
Andy Webb: not going to help you. So really if you can,
Andy Webb: finding that trusted friend or family member who you feel
Andy Webb: will let you talk about it. I'm like this often.
Andy Webb: Someone comes to me a problem, I'll try and help
Andy Webb: them and things like that. If that doesn't work for
Andy Webb: you, then they just need to talk about it. Because sometimes this
Andy Webb: is about just talking about it, getting it out in
Andy Webb: the open. Or maybe you have got that person who
Andy Webb: you know is pretty good on these things and they
Andy Webb: can give you the more practical tips as well, but
Andy Webb: find the person that works for you just so it's
Andy Webb: out there and you start to talk about it. And
Andy Webb: I guess I wouldn't say owning it isn't quite right,
Andy Webb: but it just stops becoming this thing you're trying to
Andy Webb: get rid of and hide away you from. It's something
Andy Webb: that you can actually, right, " I need to do something
Andy Webb: about this, I need to take some action."
Kia: I agree with that, finding someone. And sometimes not everyone
Kia: wants solutions. So many people just want to talk and that's absolutely fine. So
Kia: Andy, before we wrap up here, what are your top
Kia: three tips help our listeners manage their debts?
Andy Webb: First of all, if you have got a number of
Andy Webb: debts, it's about prioritizing them. Find out which ones you
Andy Webb: really need to focus on without forgetting the others, but
Andy Webb: just making sure that you've got the solutions in place
Andy Webb: that those big ones don't get forgotten. Then I would
Andy Webb: look about motivation. What is the one that's going to
Andy Webb: kind of, the way that's going to really make sure
Andy Webb: you can take action on this. Because there are different
Andy Webb: approaches and everyone's going to work a little bit differently.
Andy Webb: It's not going to be easy, but you want to
Andy Webb: find the ways that you can see success, you can
Andy Webb: see you're getting through it. But ultimately if this isn't
Andy Webb: helping and you don't feel you can do this on
Andy Webb: your own, it's getting help. Talk to that friend, that
Andy Webb: family member, talk to those free, independent and impartial debt
Andy Webb: advice charities and they're the ones who kind of all
Andy Webb: together that hopefully sees you through all this. And then
Andy Webb: we're talking about building wealth once you've got rid of the debts.
Kia: Amazing. Thank you so much, Andy. This has been a
Kia: really good episode. And hopefully our listeners, if they are
Kia: struggling, this is step one and day one for them
Kia: to make that change and tackle their debt. So thank
Kia: you so, so much. Next time we're helping you get
Kia: your dream job. But if there's anything you'd like me
Kia: to chat about on future episodes, get in touch via
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