Short Term Debts
Financial Health check should be carried out annually or once every 6 months. It is an analysis of income and expenditure which enables effective planning. In my previous blogs I have covered two vital components of an effective Financial Health check which are income (Keys to good Financial health – Income )and long-term loans (Keys to good Financial Health – Expenditure). In this blog, I will be focusing on short term debts.
Short term debt is a loan taken for a period of less than 5 years. This includes bridging loans, credit card debt and overdrafts.
What was the money spent on?
This is an important question to ask yourself, checking your statement will be beneficial. Using short term debt finance to cover day to day expenses like groceries, fuel or bills etc. without paying it off immediately could be an indication of cash flow problems.
In my experience, most of the times I have reached to used my overdraft or credit card it has been a result of impulse buying or an emergency. With impulse buying, I now try to delay purchasing the item. When I have had the time to think about it I have realised that I didn’t need the item anyway. Having an emergency savings fund or some savings accessible is a better way to deal with emergencies and it is less expensive.
How much is it costing you to use short term debt?
Credit card lenders charge interest for the outstanding borrowed amount if it is not fully paid back. The interest charge is higher for cash withdrawals. For overdrafts it can either be a daily or monthly fee, interest charged on the money borrowed and this is also highly dependent on whether it is planned or not. Unplanned overdrafts are more expensive and can have an adverse effect on you credit score. The first step is to look at your bank statement to ascertain how much is actually being charged then review income to see if the balances can be paid off. The interest charged by the lenders could be saved or invested in other projects.
Can you clear the debt in the next few months?
Most short-term debts accrue interest daily or monthly for balances outstanding. This can be very expensive in the long run if not cleared in a timely manner.
If the balances cannot be cleared within a few months due to financial constraints, it is advisable to seek further information from a bank regarding consolidating the debts (if they are many) and maybe taking out a long-term loan which may be cheaper. Another option for credit card debt is transferring the balance to a credit card that has 0% interest. I would advise cutting up the card to ensure it is not used for more purchase. Detailed care needs to be taken regarding the period the 0% interest will last and if the balance can be paid off before then. Further information and guidance can be sought from the lender for individual situations.
Should you save or payoff the debt?
If you are paying more to borrow than you are receiving when you save, then it is financially beneficial to clear the debt before you start to save. For example, if the APR on a credit card is 20% and the annual interest rate on a fixed savings account is 2% then you are effectively making a loss if you save instead of paying off the debt.
Short-term debts can easily snowball into a large debt if not managed properly. Regular review is imperative however, not using them at all will save you money in interest which can be invested else were.
Categories: Personal Finance