The majority of consumers have some type of debt, whether it’s credit cards or loans. If you’re close to your limit every month, it can stop you paying for the necessities in life. Is raising your debt limit always the right move, or is it better to tackle the situation?
Even before the financial crisis, many consumers were regularly reaching their credit limits every month, leaving them with little flexibility in their monthly budgets. With the economy still unstable they’re finding it more difficult to stretch their money to cover all their commitments.
The Right Credit Limit
For those that rely on credit cards to pay for necessities, it’s important that you have a limit that’s useful, as well as affordable. A limit that’s too low and you’re at risk of running out of money. However, if your limit is too high, you might spend more than you can afford to pay back.
Being close to the limit also hampers any attempts to get additional credit. If you’re always close to your available credit limit, your credit score will be lower, as lenders assess you as a higher risk. If you spend the same amount, but have a higher limit, your credit score could be higher. This is because lenders see that you’re using the credit wisely and managing your debt.
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Not Raising the Limit
It’s not always possible to raise the credit limit and this could mean you can’t meet your financial commitments. If you don’t have any money left after you’ve covered all the necessities and priority bills, then you could end up defaulting on your repayments. If this happens and there’s no other way of obtaining additional income, it’s useful to look at the alternatives.
The Debt Solutions
A debt management plan could be the solution if you have unmanageable unsecured debts. The advisers will work with your creditors to come to an arrangement that works for all parties. This can sometimes freeze the interest on a debt and will combine all the repayments into one monthly amount. With lower or frozen interest, it’s possible to repay the debts quicker.
Temporary repayment plans are similar, but you will talk to creditors and agree the repayment amounts yourself. They’re an informal agreement and are designed to tide you over until your financial circumstances are more stable.
A more permanent solution to debt problems is an Individual Voluntary Agreement (IVA). This is a legally binding agreement where you pay back the debts over a fixed period of time. If you own property, you can be required to release a portion of any equity in the property in the fifth and final year of the IVA. This will be administered by an Insolvency Practitioner who will work with your creditors to freeze interest and agree to the proposal a deal. They don’t have to agree with it, but it’s usually in their best interests to do so.
It can be a stressful time if your debt ceiling can’t be raised, but it also might be an opportunity for you to consider your financial situation and look at restructuring your debts.
Celina writes regularly on personal finance issues for a range of consumer finance websites and blogs. Her main area of interest is providing advice for consumers in debt and discussing solutions to their problems. You can find out more about debt consolidation options at Consolidated Credit.