We're paying off our debts the wrong way

debt struggle bills©iStock.com/Fertnig

INDIVIDUALS are taking on unsecured debt at a faster pace than at any time in the past decade - and prioritising its repayment over other bills - according to research.

The Money Charity say that the average UK adult owes £3,629 through credit cards, personal loans and others forms of consumer debt - an increase of £201.76 compared with 2015.

At the same time, however, Citizens Advice say that more than a quarter of us (28%) are trying to clear this type of debt before we deal with other, more important outgoings.

As they point out, the danger is that by paying off credit cards and overdrafts before household bills, we're putting ourselves at risk of greater "financial and emotional hardship".

Multiple debts

Half of adults in the UK have both household and consumer credit debts; when it comes to consumer credit, more than a third of it is held on credit cards, with each of us owing an average of £2,387.

The Money Charity say that for a card bearing the average balance, with the average interest rate, someone making only the minimum repayment each month would take 25 and a half years to pay off their balance - and that's if they don't add any more to it.

The often quoted number one rule with credit cards is to pay them off in full every month to avoid paying any interest.

However, if or when that's not possible, most of us know enough about how credit cards work to realise that the more we can pay off each month, the less interest our borrowing will incur, the quicker we'll clear it, and the less we'll have to pay off in total.

Faced with a large credit card bill that only threatens to get larger if we don't make a significant dent in it, this may be why some of us choose to prioritise these kind of debts over household bills.

Another reason is that consumer credit companies "shout the loudest", as Citizens Advice put it.

Part of this is because they're legally bound to make it clear what could happen if we fail to make or keep up payments, and the FCA have commented on how many credit card companies are quick to act if it looks like we're serious danger of defaulting.

However, they seem less inclined to step in with customers who have persistent - but not default level - debt.

The cynical among us may say that's because they make a considerable proportion of their revenue from fees and interest charged on monthly balances.

Serious consequences

By comparison, missing the odd payment to the local council, our landlord, or on the TV Licence can seem relatively benign - we might get a firm letter or two reminding us to pay up - but the consequences can quickly escalate if we ignore them.

But as the chief executive of Citizens Advice, Gillian Guy, says, falling behind on household bills has "serious consequences" - from "getting the power cut off to bailiffs knocking at your door, to losing your home or even prison".

In 2014, for example, 185,580 people in England and Wales went to court for non-payment of the TV licence, with 39 being jailed for non-payment of fines arising from evasion.

In 2015, the number of people forcibly removed from rented accommodation reached a record high, with 42,728 households being evicted by bailiffs in England and Wales.

Citizens Advice say that the number of people approaching them with problems relating to rent arrears have increased by 4% since 2015, while council tax debt issues have increased by 7%.

These figures are particularly worrisome given that councils are becoming ever more willing to send in bailiffs to collect outstanding debts.

By contrast, the number of credit card issues has fallen by 5%, while the number of personal loan problems has fallen by 6%.

Creating order

But while we seem less concerned about the fact that we're taking on more unsecured debt, we are worrying more about our failure to pay essentials such as rent and utility bills.

As mentioned above, it's possible that many people are instinctively prioritising the largest debt - but this isn't the best way to approach the problem.

As we explain further here, the debts that need addressing first are those with the most serious consequence if they go unpaid.

These "priority debts" include things like mortgage, rent and council tax arrears.

If we don't have much money left over after covering living costs, it can be split if necessary, as creditors are usually willing to accept something rather than nothing.

The key thing is to contact each creditor and explain the situation - they may be able to offer an alternative arrangement.

Energy and water companies, for example, are obliged to discuss payment options and repayment plans for customers who are in arrears - and the consumer credit companies are supposed to be willing to negotiate in a similar manner.

Several utility companies also operate trust or hardship funds, designed specifically to help people pay for the costs of energy or other essential household bills.

However, StepChange have recently repeated their calls for the Government to introduce a statutory "breathing space" scheme for people in temporary financial difficulty.

The charity's Mike O'Connor says that while some creditors do offer support to those in debt, the "lack of a consistent approach and the lack of statutory guarantees" means that just one creditor can derail someone's efforts to tackle their financial issues.

It's possible then, that even when someone has done what O'Connor calls "the right thing" and sought independent advice, they're still feeling pressured to service their loudest creditors - despite the potential consequences.

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