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When push comes to shove, it’s time to shift those debts

Mortgage and credit card bills may feel like an immovable object but planning and determination will help cut them back down to size, writes Linda Daly

In its most recent household credit market study, the Central Bank of Ireland reported that Irish household debt continued to fall. Yet the review, released in May, also warned that we were among the most indebted citizens in Europe.

Household debt stood at €143.8bn at the end of 2016, equivalent to €30,199 per person. Ireland has the fourth-highest debt-to-income ratio of 17 countries in Europe. Our debt-to-income ratio is lower than that of Denmark, Holland and Sweden, but it’s higher than the ratio of 13 other European countries, including the UK, France, Germany and Italy.

While mortgage debt represents by far the highest proportion of borrowing, consumer credit is also significant. Banks are back lending and, in the 12 months to March 2017, the number of one- to five-year loans taken out by consumers jumped by 9%.

The Central Bank has warned that Irish borrowers are still exposed to an increase in interest rates, and those in the 30-44 age category have the highest debt-to-income ratios. Whether or not you are on top of your debt, there are ways to start clearing it now.

Put a plan in place
Brian Leslie, managing director of Prima Finance, a debt solutions company, said the first thing you should do is draw up a weekly or monthly budget.

“When you have an idea of your monthly incomings and outgoings, then you can see what is left over to service your debts,” he said.

If you have cash to play with each month, you could pay off your debt faster, added Leslie.

“If you have insufficient funds, it’s about trying to prioritise what debts are more important,” he said. “The priority has to be the secure debts; take care of the family home. Try to negotiate with your other lenders.”

Pay off the most expensive debt first
A general rule of thumb is to pay off the high-interest loans quicker — because they eat into your cashflow.

The Central Bank report found that credit card and overdrafts had the highest interest rates, which averaged out among the main financial institutions at 14.9%. Term loans, both secured and unsecured, have interest rates of 10.2% and 10.4% respectively. This compares with interest rates of less than 1% to just below 4% for mortgages.

“If you have credit card debt, you could be paying up to 20% interest,” said Steven Barrett, managing director of Bluewater Financial Planning. “You’ve got to work on personal or unsecured loans because the interest rates tend to be higher.”

Brendan Burgess, of consumer forum Askaboutmoney.com, said it was vital to understand your credit card debt.

“What are the rules that allow you to get it interest free? If you pay off the balance in full and on time, you won’t get charged interest,” he said. “Instead of paying the minimum amount each month, try to pay your balance in full and on time — if you can.”

The snowball effect
Eoin McGee, principal of Prosperous Financial Planning, prefers the snowball method as a debt reduction strategy. Here, you pay off your debts in order of the smallest to the largest, regardless of the level of interest.

For example, if you owe a family member €1,000 interest free, have a two-year term loan of €3,000 and a credit card debt of €5,000, you start by paying back the lower amount: the €1,000 interest-free loan.

You start with the smallest debt and work your way up. When the smallest debt is paid off, you roll the money you were paying towards that on to the debt of the next smallest loan and so on.

McGee said there were psychological benefits to the snowball method; by clearing the small debts quickly you will feel like you are on top of things, and ultimately stay engaged with the debt management process longer.

“You get the wins quicker, so that it has better overall outcomes,” he added.

Be disciplined
Barrett said if your goal was to pay down your debt, you should be disciplined. Not unlike savings, it can be a habit. “Don’t say, ‘If I’ve a few quid at the end of the month, I’ll throw it on my credit card,’” he said. “If your goal is to clear a loan quickly, there should be a direct debit going towards that loan — even if it is your credit card — the day after payday.”

Too many people leave their credit card payments until the end of the month, when resources are dwindling.

“It’s always a tedious discussion but people need to rein back their living expenses,” said Leslie.

Reduce your interest payments
It is very difficult to consolidate your debt into a lower interest rate loan at present. However, you can still look to strike a deal.

Too many people leave credit card payments until the end of the month, when resources are dwindling

Karen Goodliffe, director of HerMoney, said you should ensure that the interest rate on your mortgage is competitive. “Some financial institutions are trying to entice homeowners on to their books with offers of cashback at present,” said Goodliffe. “If you are on a fixed or variable rate and are in positive equity, then you should approach your current provider about reducing your interest rate.”

Switching your credit card and moving your debt to a new issuer could save money. Chill Money recently started providing Mastercard credit cards and is offering nine months’ interest free on balance transfers. You will pay interest on any new purchases, however. The Chill APR is 22.9%.

“This only works if you don’t use the new credit card (for new purchases) and make sure you get rid of the old one,” said McGee.

PTSB offers 0% on balance transfers for six months and 0% on purchases for three months. It has an APR of 20.7% on its ICE card.

Liquidating your assets
If you come into money — whether through a gift, by selling off assets or cashing in investment funds — you should consider using the money to pay down your debt.

“I have come across a lot of people who have €10,000 in a bank account, which is earning 0.1% interest, and who have €10,000 with the same bank on a credit card and are paying 18% interest on it,” said McGee. He suggests using the €10,000 to pay off the debt and then using the money you would have spent on servicing the debt to build up your savings again.

McGee is not in favour of using lump sums to pay down mortgage debt. “There are many people out there with tracker rates and they are paying off the cheapest debt they will ever have,” he said. “If you pay a lump sum off your mortgage you have no way of getting it back without remortgaging. The only time I would suggest you pay off a mortgage with a lump sum is if the repayments are so bad on a month-to-month basis that you can’t cope. The lump sum in that scenario could bring your payments down to a manageable amount.”

McGee admitted it might make “emotional sense” to a person to pay off their mortgage. “It’s about having the best life outcomes. If emotionally you feel better, then do it.”

A little can go a long way
Increasing payments on flexible term loans, even by a little bit, can allow you to pay off your debt quicker.

“If you took out a five-year loan of €13,500 at 8% interest and paid €273.73 a month, it would be gone in five years. You would hardly feel an increase if you rounded it up to €300, yet doing this would reduce the term to exactly 4½ years. It knocks a whole six months off the term and saves you €224 in interest,” said McGee.