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A Guide to Understanding Debt

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Understanding debt and how it works is the key to your financial security. Working out ways to pay your debts can cause anxiety and sleepless nights, but debt can also help you towards buying your own house or car. It all comes down to understanding and managing your debt effectively, and financial literacy is the key.

There is more than one kind of debt, and not all debt is created equal. Understanding different kinds of debt and how it works can help ensure you don’t bite off more than you can chew.

What is bad debt?

Bad debt is debt that is accumulated through the consumption of goods and services that will not bring you any added value – generally speaking, consumer debt. This is usually credit card debt due to spending restaurants, clothes, and anything that has been consumed and cannot bring you value. In contrast to this, “good debt” might be debt as a result of getting a mortgage or pursuing a higher education to get a high-paying job, as these things result in something valuable that will continue to appreciate in value.

Repayment plans

Companies such as Wonga work hard to ensure people understand their debts and how best to tackle them, so that you can evaluate your finances and make the best decisions to streamline your spending. Simply calling your creditors to negotiate your debt can go a long way towards reaching a payment plan that suits your needs without driving you further into debt.

 

Debt relief

If you’re having trouble paying off your debts, understanding how debt relief works can go a long way towards digging you out of your financial hole. Lots of non-profit organisations work to help people combat debt, and even talking through the solutions with someone who knows can really ease some of the burden.

As credit card debt has some of the highest interest rates around, it can be one of the most difficult debts to tackle. Even making the minimum payment doesn’t do much to pay off your debt, as interest on top of that usually puts you back at your starting point. The only real way to pay off your credit card debt is to make the minimum repayments and make extra payments on top of them. Credit counselling organisations can help you create a debt management plan, and often you can pay them to pay creditors on your behalf which could qualify you for reduced interest fees.