How To Avoid the Situation of Consolidating Debt

According to a BBC report, the core inflation rate fell down to 6.8% in July this year. The prices have come down on items like milk, cereals and bread. Yet, the prices are as high as 14.9%. In order to slow down the price rises, the Bank of England has increased interest rates to 5.25%.

Despite the rise in interest rates, consumer borrowing is running at record levels. The reason is the availability of credits at luring interest rates, and wages are not proportionately rising to the rate of inflation. You tend to continue borrowing money on and off and eventually fall into debt.

Although loans seem too easy to pay off, you find yourself cash-starved on the due date. If you manage to have cash to clear your dues, you are left with little money to meet your essential expenses, and then you reapply for a loan. The cycle goes on and never comes to an end. In order to clear all debts, you decide to take out a personal to merge all your outstanding debts, but debt consolidation loans for poor credit can become very expense.

Further, most of the lenders will not give the green light to your application unless you have a decent credit score. It is likely that when your credit score is poor, your lender will not let you borrow the sum equivalent to your outstanding loans.

Consolidation loans will not be the best bet for you all the time. It may cost you a fortune. So, how can you dodge a situation that pushes you to take out a consolidation loan?

• Create a budget

You will not get a true picture of your finances until you create a budget. The most common reason for borrowing a large sum of money is that you keep spending on frivolous purchases. Money management is crucial if you want to stay in control of your expenses.

First, you should review your monthly expenses for the previous six months to get an idea of average spending. Then, figure out how much you pay on discretionary or essential expenses, including those you thought were necessary but could put off.

A standard rule says that you should whittle down your inessential expenses. Over time, you will see this habit will help you avoid borrowing money every time. If your budget is too tight, you should also find the scope of cutting back on essential expenses.

For instance, you should try to consume less energy so your energy bills do not eat up your savings. Switch to a cheaper mobile and broadband plan. Cancel subscriptions to magazines or print media when you can get information online free of cost.

• Build an emergency cushion

You must have some savings to stand-in during the surprising expenses crop up. Having an emergency corpus will save you a lot of money on interest. You should set aside minimum of 10% of your income every month. It is a better idea to save 20% if you can.

Of course, the percentage of your savings depends on your monthly income. Make a habit of serving yourself first, meaning you should save as soon as you receive your pay cheque. Linking your savings account to your pay account will help you manage both accounts in the comfort of your home.

As your income grows, you should also increase the proportion of your savings. If you have to withdraw money from your savings account to meet some expenses in a particular month, you should try to cover the balance in the next month.

• Grow your savings

Savings accounts do not offer much interest. Even if you do not withdraw funds, you will not see any significant rise in your balance. You should do efforts to earn money from your savings through other ways. For instance, once your balance grows, you should buy a fixed deposit.

You will not be able to use this money for a period of time, but you will get very attractive interest. You can also seek investment in the stock market if you have knowledge about shares. However, you can consult a financial advisor or investment expert who will help you guide you about the market so you can decide how much you should invest in. It is vital to determine the risk-tolerance capacity before investing money in stocks.

• Shop around if you need to borrow

It is likely that your savings fall short of cash when you need money for an unexpected expense. Borrow money only what you need on top of your savings. Even a little extra borrowing can increase the risk of falling into debt as you have to pay interest in addition to the borrowing sum. You should shop around so you get the best deal from an online lender. Interest rates vary by lender, so be thoughtful.

The final comment

You can avoid the situation of consolidating debt if you create budget, set aside money for a rainy day, grow your savings and look for better interest deals.