Written by Alex Sims
Got questions about debt? Financial expert Ellie Austin-Williams, founder of This Girl Talks Money, explains everything you need to know about borrowing.
In Stylist’s new digital series In the Red, we investigate how debt is really impacting young women in 2022 – from our connection with credit cards and shopping to examining how debt informs our relationships, our beauty regimes and the way we operate in the world.
Whether we like it or not, debt is a part of all of our lives. From student loans and mortgage repayments to credit card payments and dipping into our overdrafts, it’s become a familiar aspect of our day-to-day.
But despite impacting nearly everyone, debt is often seen as something scary and overwhelming. In a Stylist reader survey, 74% of the 2,247 respondents said they worried about debt, while 58% said debt had impacted their lifestyle choices.
So how founded are our worries about debt and can understanding more about it help us make better financial decisions?
“Debt can be useful,” Ellie Austin-Williams, a millennial money coach and founder of This Girl Talks Money, tells Stylist. “The way the financial system works means using debt well is rewarded. So, if you avoid debt, you don’t actually do yourself any favours.”
“At some point in our lives, most of us will want to borrow money or buy a property, and lenders want to know you can pay it back,” says Austin-Williams. “Banks don’t care if you have loads of money sat in savings. They want to know you can borrow and pay back reliably. The only way to prove it is by doing it.”
Austin-Williams worked at a private pensions company before founding her platform in 2019 out of frustration that the personal finance industry didn’t engage properly with young women.
In order to learn more about debt and how to deal with it wisely when it does impact our lives, we put some common questions to her about being in the red.
What should I know about debt?
“Debt is money borrowed from one party to another and there are various different types. The main thing to establish is whether debt is secured or unsecured.
“Secured debt is secured against an asset. The main example of this is a mortgage. If you don’t pay back the money you owe, the lender has rights over the asset so they can come and seize your property.
“Most debt, everything from credit cards to car loans and store cards to overdrafts, is unsecured. So although there are repercussions for not paying it back, they don’t have that huge stick over you. There’s also more legal protection around consumer credit.
“You also have an element of control around consumer credit. You can ask your bank to put a limit on your overdraft or reduce your credit card limit. But you have to ask. Otherwise, they will do what’s in their best interest.”
What should I know about interest and debt?
“When you take out any form of credit or a loan you will either pay interest on it or you won’t. With the vast majority of borrowing, there is interest to pay.
“There are various different promotional offers lenders will give to different people at different times to entice them. One of those might be an interest-free period. A lot of credit card companies will offer this. But there are a couple of catches and you must always read the small print.
“Companies may entice you to apply for a card to get 24 months interest-free, but that’s often the maximum you can get. Once you’ve applied, you could end up getting just 12 months.
“The other biggest red flag is that even if you’ve got an interest free card, you still have to make the minimum payments every month or you lose that interest-free period. The safest thing to do is always set it up as a direct debit so it will come out every month. Make sure you know when the interest-free period ends, so you can clear the balance beforehand.”
If you’re struggling with debt, what is the best way to start paying it off?
“When you’re in that situation it can be overwhelming. So, the first step is to get a clear picture of what you’re dealing with. Go through all your finances, your ongoings and outgoings and write down on one piece of paper or spreadsheet what you owe and what you’re paying in terms of interest. This means you have everything in one place and have a bird’s eye view of what is going on.
“Once you’ve got an overall picture, then you can start making decisions. In terms of where to start, I would choose one target and focus on it. Don’t try and pay everything off at the same time or you’ll overwhelm yourself. Go through your budget and figure out how much you can direct towards clearing that first number. Be realistic and make sure you’re making payments that feel manageable, even if it’s £20 a month.
“It’s also helpful to take the mental labour out of it. Set up a standing order on the same day every month or when you get paid that will go towards that one outstanding balance and just get into a routine. The more you can set up things to run in the background and automate them, it will start to happen without you even having to think.”
How should you prioritise paying off debt if it’s spread across multiple areas?
“There are two different methods of doing this. People have different views on which to go for. The first option is to pay off the lowest amount you owe first and tackle the rest from lowest to highest. The second option is to pay off the highest interest-bearing debt first.
“It’s best to pick one method and stick to it. Often paying off the most expensive debt first makes the most sense financially, but because as humans we’re motivated by achievement, paying off one smaller debt more quickly can spur you on to the next one.”
What should you do if you’re in debt but want to start saving? Should you prioritise paying off debt or adding to a savings pot?
“For most people, it’s about looking at what is going to make the most sense financially. Lots of people who have some debt want to save to feel like they’re making progress. But, if the interest rate on your savings is lower than the interest rate on the debt you’re paying off, it often doesn’t make financial sense to save. Instead, it’s better to redirect that money towards reducing your debt balance.
“Unless you’ve got interest-free debt – because interest rates on savings are so low at the moment – you’ll nearly always find that paying off the debt is the better financial decision.
“That being said, I’d always encourage people to try and put aside a bit of cash. Have around one month’s worth of emergency funds so if something out of blue happens you have the cash there to use rather than relying on credit again. If you can get that one month of expenses, then try to focus on getting your debt balance down. It will usually serve you better in the long term.”
Will the cost of living crisis affect my ability to pay off debt? What can I do if I’m worried about it?
“If you’re really, really worried, speak to your bank or lender. If you cannot make payments don’t just miss them. Banks and lenders usually have the ability to pause to give you breathing space or reduce monthly repayments. They have all sorts of powers, so don’t be afraid to speak to them first.
“Speak to a debt charity like Step Change. There are some brilliant charities that are experts in dealing with this and can help people navigate these situations. Also, talk to somebody. Often not talking about money can make you feel like you’re completely alone when the reality is loads of people are going to be struggling over the next few months and years until the cost of living gets under control.
“It’s also worth doing a bit of a spring clean. Look at what you’re spending and look for any ways you can make easy changes. I would always say, don’t cut out every bit of enjoyment from your life. Look for easy wins, but don’t set yourself a budget that means you can’t leave the house.”
Should I clear my debt before I get a mortgage, or should the money go towards a house payment?
“It really depends on the overall picture of your finances. When you are applying for a mortgage, the lender will look at what outstanding debt you have, but it’s not one-size-fits-all.
“If the debt you’re paying off is costing around £100 or £200 a month and clearing it all would mean taking off £5,000 pounds from your house fund, often the better option is to keep just paying it off each month. But it depends on how much it’s costing you.
“You need to look at the holistic picture of your finances. The best thing to do is speak to your mortgage advisor because they will know your specific situation.”
Will I ever pay off my student loan debt and should I be worried about the potential student loan increase?
“The first thing to figure out is which student loan you have: plan one or plan two. The plan you have depends on when you went to university and they work very differently.
“If you’re on a plan one loan, it’s very rare there is a need to overpay. Plan two is different. All of the news at the moment about interest rates increasing is still up in the air. So I would say hold your horses.
“For anyone wondering whether it’s going to impact their options in the future, student loan debt isn’t treated like any other debt. It’s viewed more as a graduate tax in the sense that you don’t have to pay it until you’re earning a certain amount of money, it gets written off after a certain number of years and it doesn’t affect your credit score.
“However, it does affect your affordability. When you come to borrowing for a mortgage, lenders will look at what you’re paying each month towards your student loan.
“The reality is a lot of people won’t ever pay it off and it can be frustrating seeing it on your payslip each month. People might think: ‘If I pay it off, I could have that extra money each month.’ This is true, but for most people, there’s often a better use for your money.”
Speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.
If you’re concerned about debt, please get in touch with Step Change, Citizen’s Advice or National Debtline. If you’re worried about your mental health, you can contact Mind or Samaritans.
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