I hate debt, period. I’d rather spend my free money on luxuries, but there you have it.
After receiving a credit card statement recently, I spoke with my mother. It still shocks me how there’s such a disconnection between the realities of having debt and paying it off.
I write this as a person who has debt themselves. My total “debts” are about £17k so I generally know what life is like with no money. I’m fortunate enough to have a job, so I’m chipping away at my debts. My debts however are going to be something that will take me probably 3-5 years to pay off. They’re always on my mind
There’s plenty of argument to increase the minimum wage to the “living” wage. This will rarely happen though. I see shows like Rich House Poor House as sites with a bit of disillusion. Apparently most “poor” families have various amounts of free money left after all “bills” are paid off.
I’ve seen anywhere from £25-£130 per week. Apparently food/groceries aren’t considered essential bills to these shows, so the families have to do their Grocery shopping on this amount. I think it’s a bit stupid. Essential bills are things you need to pay to live. Anything that’s not essential are bills in which you can afford to put towards debt.
Seems stupid amount really. To me being poor means you’re either overdrawn every month, or you have about £2 left in the bank after all bills/shopping is done. So you’d rather put that £2 on a lotto ticket, scratchcard etc as a simple punt.
Living with debts to me, is someone who has no free money, and simply goes to work to pay the bills. Nothing more. Below are my thoughts, on the actual reality when it comes to debts and being “poor”.
What do the Creditors tell you to do?
Most lendors/creditors, will tell you that you should over pay or make additional voluntary payments towards your Debt such as a credit card. They spin this by saying that you will save money because the debt will be paid off quicker you will pay less on interest.
Is this true? – Yes, however they need to see the whole picture. It’s pointless saying you can save £500 in interest in the long term for example by overpaying an additional £70 per month. Mostly because this is probably something which a poor person can’t afford.
What is the reality like?
Well, to be plain and simple about it. People who have debts / credit cards, and are living beyond their means, or on low wages. Simply can’t afford it. These people in reality have maybe £5 in their bank each month, are living payday to payday just to keep the bills going. Use their overdraft, and generally use their cards for emergency purchases such as a new washing machine.
So when creditors threaten to suspend your cards, because you’re paying them but not fast enough this is a lot more stress. Simply because it’s a life line. The card WILL eventually be paid off by sticking to minimum payments, it will just take longer. Most people in financial hardship or poverty are fine with this. Simply because we’re used to “juggling” money around.
Usually when these people finally get some money saved up, something usually happens which messes things up again. This is one of the big difference between Rich and the Poor.
A person who is financially rich can afford to put money aside for a repair without much care in the world. Or fix up their house with parts they’re not happy with. A person who is financially poor has to chuck it on the credit card, borrow from friends, put in some additional overtime at work, become inventive, or sell some goods to make ends meet and put towards their next bill.
Is it better to pay off the interest, or minimum payment?
In an ideal world, it’s always better to pay more towards the card, which will indeed pay off the card faster and save you money in the long term. In theory this is excellent, and yes, it’s true you will save money in the long term. The reality however this information is useless. Simply because people who had racked up debts, would pay more money… if they could.
Money is the one thing I keep tracking constantly as part of my financials. My debts take up approximately £460 per month out of my wage. Which is a lot of money. I want to do this not for just personal reasons, but also financial. It’s money I can put towards a retirement, save up for rainy days, and work on my projects which focus towards improving quality of life for people.
What a lot of creditors don’t understand (or really don’t care), since they only want their money back. Is that when you are living paycheck to paycheck, you have zero free money or very very little. Also your card is your source of additional spending for emergencies.
It’s pointless a creditor saying “stop using your card”, money doesn’t grow on trees. So it’s better to have something which has £500 available for emergency use if needed. Generally credit ratings for this type of person are so rubbish, they can’t get a consolidation loan to get them out of their problems.
In terms of interest – most people know that interest is what cripples you on a credit card.
In an ideal world, you should pay off the interest more. If you’re financially poor though, it’s better to pay minimum and save up. The only exception to this, is if you have a high APR card (something like Vanquis), it would be better to get a loan and pay it off, than to actually stick to the minimum payments.
My credit rating was destroyed (still is in a sense, but it’s better now). One of the only cards I could get at the time was Vanquis, the danger with this card is that the APR is extortionately high, and if you stick to the minimum payment.
Your financial situation will just become worse and worse over time. I think at the time my minimum payment was £100 and it was barely covering the interest charged, so it was paying off about £2 per month from the balance. In the end I obtained a loan and consolidated my debts, which saved me the money long term. You’re always borrowing, but when you live paycheck to paycheck the priority isn’t paying off the interest. The priority is making sure you have free money at the end of each month so that you can focus on your debts, or paying essential bills, or dealing with emergencies.
What does it do to the person?
Generally someone who’s poor or in poverty, you will find their houses will probably have something broken. It’s not a case of that persons house is like that because they have no pride in it. The reality is that they probably can’t afford £100 to buy a new door, £150 to get a new tumble dryer, etc. It’s why so many families buy from “catalogues” because it allows them to jumble around money when times are tight.
A poor persons house is probably going to be neglected. What’s more important paying £50 to repaint the walls, or £50 to feed the kids?
Also the mental health takes a toll because all the person feels is they’re working to pay bills, they don’t get any pleasure in life. So you’d probably find most people who are poor are depressed and I would guess it’s sometimes reflected in their house.
Sure, painting the walls may improve the overall mood and reduce depression. However the reality is that when you’re poor you probably have very little pride left, because you stop caring as much. You’re just trying to get by like everyone else and priorities to you are the essentials and family. Not the condition of where you live.
Don’t judge people on their past
Not everyone with debts has acquired them through their own stupidity. Sometimes they do, but sometimes they’ve had hard times or just plain bad luck.
My mistake was accepting a credit card and sticking to the minimum payments. Rather than paying off the balance in full. I also paid money on the card, rather than just getting a loan instead or saving up. You learn through your mistakes.
I actually never had debt until I got a Credit Card, I always used to save up.
After this I had a string of bad luck, my credit rating was destroyed from car finance APR. Then I had a car crash, which meant more money needed, and then i had to buy a new car. They all had knock on effects for me
I would consider myself financially savvy, I know where every penny of my bills go, and how much I’m spending. I can actually monitor where I can make savings and where I can’t.
At this moment in time, my goals are towards making more income. Even if it’s just an extra £500 per year, that’s an extra £500 I can chuck on my debts. If it means buying one less loaf of bread per week, that’s an extra £55-£60 per year I can save and put towards debts.
If someone handed me a cheque for £5k, I’d just instantly put it all on my debts. It would save me about £250 per month, and like compound interest. That extra free money helps you pay off debts a lot quicker.
What about Credit Ratings?
Credit ratings also have a lot of influence on the APR and Loans you can get offered. When I had an excellent rating (999), the APR I was offered was about 7.9%, which is still high. As a low credit rating, I’m generally offered around 15-30% now which is annoying, it takes time to rebuild. This is why it’s important to work on restoring credit rating as fast as possible. The sooner you can get better offers, the better you can consolidate.
What can you do about it?
I’m always researching methods to help pay off debts. The website MoneySavingExpert is well known, and a great source of financial advice.
- Sign up to a credit monitoring site. There are 3 sites I use to monitor my credit rating, all of which are completely free. The sites names are Noddle, now known as Creditkarma, Clearscore, and Credit Club. The last one being a partnership through Experian and MoneySavingExpert. This is useful in finding out areas where your score is weak, what debts you have and ways to improve them.
- Create a financial monitoring calculator. If you really want to track your financials, you either need an app for your phone. Or somewhere like a spreadsheet so that it tracks every bit of money inbound/outbound. I’ve created one on this site for download.
- Focus on clearing high APR. I’m talking about extortionate ones like Vanquis, if you have a card like this. Seriously consider getting a loan. One of the companies who actually offered me a loan was Everyday Loans. They’re designed for people with bad / shitty credit ratings. APR isn’t the best, but it was way better than Vanquis and one of the few that would accept me. Their criteria is a bit different, in a sense that. As long as you’ve showed effort in history to pay bills, you’re generally accepted. It’s the people who don’t bother paying back they will reject.
- Cut back where you can. If you can afford to not have some drink, cigarettes, spending money, it will help. These aren’t essential.
- Trick the system. I haven’t tried this, but it’s worth researching or looking into. I read that if you make two smaller payments, it tricks the Creditor system into thinking you’ve made two payments in one month which somehow alters your rating. I think it’s because the system thinks you’re making more regular payments towards debt. So rather than an £80 direct debit, maybe try paying with a standing order of 2 x £40 during the same period. This may or may not work, but I’m mentioning it, because I’ll probably try it myself.
- Identify new ways ways to make more money. Poor people can become inventive, there are plenty of ways to make more money that don’t involve money, or very little. I’m busy writing an article on this, but increasing your skills and making use of free training. Or generating more income is always a good way to create pay off debts. I will update this post when I finish my article.
This is the reality of what it’s like living in “poor” areas, financial hardship, or paycheck to paycheck. The only realistic way to get out of these situations for us poor folk is to get more money and improving our credit rating. Creditors realistically don’t give a shit, they just want their money back.
I don’t disagree or hate them for it. At the same time though, I feel it’s people don’t understand the reality of these situations. When a Creditor threatens to block someones card because they’re only paying the “minimum” payment, they’re not just adding the mental stress onto someone, they’re adding financial stress.
The best thing credits can do would be to lower the APR rates on the cards so that more money is paid towards the debts, so that they can work on rebuilding their credit rating.
This is why the FCA are investigating credit lenders so heavily, rather than doing smart choices and limiting the amounts, they’re just offering extortionate credit limits because they feed off the poverty and people who need the money. Why give someone a card with a £500 limit, when we can give you a £3000 limit and know you’ll owe us forever and keep filling our coffers.