Living With Bad Credit: How To Manage Your Finances While You Repay Your Debts

Managing our personal finances is one of the toughest challenges that everyone faces when they enter adulthood. Most schools donโ€™t prepare us for how to deal with the realities of running a household and paying bills, so it can be a major challenge to adapt when we finally move out into our own homes. 

stack of dollars and black envelope with banknotes inside

As a result, some of us end up dealing with issues such as debt. Debt can be a challenge for anyone and can be difficult to get out of once you get into it. 

In the UK today, the average household has a staggering ยฃ65,151 in debt. While some debts can be useful ways to fund important steps in your life, such as taking out a government-backed student loan to pay for university, others, such as credit card debt, can be a drain on your resources. 

If youโ€™re paying off debt, then it can take a long time before youโ€™re debt-free. During this time, you still need to manage your money and ensure that you work towards financial independence. If it takes you a long time to clear your debt, you could get a bad credit rating, which can make it harder for you to access the best financial products on the market. 

In this article, we explore some of the ways you can manage your finances as you clear your debts, particularly when youโ€™re in bad credit. Youโ€™ll then be able to work towards getting rid of your debts and becoming free to get your credit rating back on track. 

Reduce Your Spending And Focus On Repaying Debts 

As obvious as it might sound, you need to reduce your spending and focus on paying back your debts to ensure that you make the process as smooth and quick as possible. How much you reduce your spending by depends on the size of your debt. For minor credit card debt that will take a few months to pay off, you might be able to make small sacrifices, such as buying fewer luxury items, cooking at home more often or switching to own-brand cosmetics and foods. 

Significant debts that will take years to repay might require more drastic cost-saving measures. For example, you could move to a smaller home in a cheaper area, or get rid of your car and start using public transport. These steps might seem major, but they will help you to get out of debt faster. Until you repay what you owe, you wonโ€™t be able to truly save money, as anything you save will always be at risk of being taken by your creditors in lieu of payment. So, focus on repaying your debts and cutting back on your spending as much as you can. You might have to go without some luxuries for a while, but the effort will be worth it when youโ€™re debt-free and financially secure again. 

Be Savvy About Taking On New Debts

When youโ€™re trying to clear your existing debts, it might seem counter-intuitive to take on new ones. However, in some cases, taking on new debt could help you to manage your finances better. For example, if you have a lot of small debts, you could consider consolidating them into one loan. 

Another example of a useful debt is a mortgage. Taking out a mortgage to buy yourself a property can allow you to invest in your future at the same time as keeping a roof over your head. Rent doesnโ€™t give you any return while investing in your own home can offer dividends in the future. Even with bad credit, you can still take out a bad credit mortgage. Get expert advice from MoneyNest, who specialise in bad credit mortgages and can offer you advice thatโ€™s tailored to meet your specific requirements. 

Know What You Owe

Many people who are in debt owe money to a variety of creditors. Itโ€™s surprisingly easy to lose track of your debts, particularly if you use โ€˜buy now, pay laterโ€™ schemes and have multiple credit cards. If you want to get rid of your debt fast and ensure that you donโ€™t damage your credit rating even further, you need to understand what you owe, and who you owe it to. 

So, you should check your credit report and review who you owe money to, and work out ways to reduce your number of creditors. This might mean consolidating your debts into one loan, so that you always know what youโ€™re paying and how much interest you will have to pay on the debt. Alternatively, you could pay off smaller creditors quickly, then focus on your larger debts. Whatever strategy you choose, itโ€™s crucial that you know what you owe and to whom, so that you can make informed choices and donโ€™t go into arrears with any of your creditors. Failing to pay back debts or missing a payment can be detrimental to your credit rating and future borrowing abilities, so if you donโ€™t understand your debts, now is the time to get your financial affairs in order.  

Avoid Hard Credit Checks

While youโ€™re in bad credit, hard searches can affect your report and make your situation worse. As such, you should avoid hard credit checks where possible. To do this, first, you need to understand the difference between hard and soft credit checks. Hard credit checks involve a deep dive into your borrowing and financial history, while a soft check is just a quick review and can be made by you or a lender. 

If you apply for a lot of finance in a short period of time, then this can be flagged on your credit report and make lenders wary. So, it would help if you tried to avoid hard credit checks and apply for as little financing as possible. If youโ€™re applying for a major loan, such as a mortgage, then try using a broker or doing your research before you approach a lender directly so that you have as few hard credit checks made as possible. 

Understand What Help Is Available To You 

Large debts might seem impossible to pay back, but there are strategies you can use and help you can seek. There are many options out there to help individuals pay off their debts, including government-backed schemes and charitable support. 

Many of these support schemes and solutions are only available to those who ask, so you need to be proactive and find out what help youโ€™re entitled to. You can then get the support you need to reduce your debt and get it to a manageable level and then, eventually, pay it off entirely. 

Managing Your Finances While Reducing Your Personal Debt: A Brief Summary 

Being in debt can be a scary experience and make you feel like thereโ€™s no way out, but there are always strategies you can use. It might take months or even years to completely rid yourself of debt and get your credit rating back on track, but the effort will be worth it in the end. 

To start your journey towards a debt-free life, review these tips and start doing your own research. Youโ€™ll then be able to manage your finances to the best of your ability while you pay off what you owe. Being debt-free will allow you to start saving for the things you really want and give you the financial stability you deserve. 

Krystal | Sunny Sweet Days
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