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How to avoid bad debts, and the alternatives when you need to borrow

As a nation we have more household debt than at any point since the credit-crunch in 2008 – totalling a huge £192.2billion and up by 10.8% from a year ago.

Mortgages and student loans aren’t included in the Bank of England figures, so this huge sum is likely down to everyday spending, for the most part. A third (£66.7bn) is from credit card spending, and the rest made up of loans.

Good debts vs bad debts

Not all debts are ‘bad’. There are some types of borrowing which can help you, such as a mortgage or student loan. Borrowing money to buy a car which will get you a job could also be a good debt as it allows you to earn a salary. Each give you an opportunity – as long as you can afford the repayments.

Bad debts on the other hand are the ones which won’t ‘pay for themselves’ in the future. These are the debts you rack up to fund luxuries, impulse purchases or holidays outside of your budget. The basic rule with this type of purchase is if you can’t afford it and it’s not an essential, you shouldn’t borrow to get it.

Borrowing to get by?

However, there’s also a third area, where people borrow to get by. If a credit card is the only way you can buy a food shop, or if a loan is needed to cover the bills these are still bad debts you are building. But they’re also a sign you now have problem debt, which can have severe consequences for you and your finances.

If this is the scenario you face, borrowing more money will make the situation worse. Fortunately there are a number of free and independent advice services you can talk to about your finances. Doing this is the first step to finding a solution.

Alternative ways to borrow

Though credit cards and loans can have their benefits – if you’re able to make the repayments on time – there are alternatives which could be far better options.

Borrow from friends and family

If you’re confident you will be able to repay any money borrowed, you might be able to get friends or family to lend to you. If you do this, make sure you agree upfront how and when you are going to repay it. You could even put it in writing so you don’t forget.

Borrow from a credit union

Credit unions are community organisations which often offer bank accounts and loans. The interest rates are often far lower than through other organisations.

Get an authorised overdraft

Unauthorised overdrafts can be incredibly expensive, so it’s better to agree one in advance if you think you’ll need one. Some banks offer an interest-free buffer, so you might want to consider switching to one of these banks.

Use a 0% purchase credit card

If you have a decent credit rating but need to space out a large purchase, a 0% purchase credit card is a very cheap way to borrow. As long as you make the minimum repayments (at least) each month and have a clear plan to pay off the debt before the 0% period ends, you won’t be charged for using the card. Ideally you’ll set up a Direct Debit to clear the card month by month.

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