What should you do after you pay off your debts?
If you’ve been in debt for a long time, paying it off can leave you a bit confused about what to do next.
No matter what approach you made to becoming debt-free, it will have been part of your budget for a long time.
With so much of your income available again, it can be easy to throw the budget out the window.
But spending in that way can leave make you vulnerable to falling into debt again.
Once you come to the end of your payment plan, there are a few things you should do to continue living without debt.
Andy Shaw, Debt Advice Coordinator at StepChange Debt Charity, said:
‘If you’ve paid off your debts, first of all, congratulations! Paying off your debts represents a huge achievement, so you should certainly keep that in mind.
‘However, there’s a risk that money worries can reoccur, so it’s important you remain vigilant about the risk of debt.
‘Establishing a new budget and taking your new financial freedom into consideration will help you with this.’
Stick to your budget
If you’ve got used to a budget, it’s important to continue what you have learned.
You may be used to a very tight budget so you can pay off your debt as quickly as possible and while you can loosen it slightly to enjoy yourself, commit to at least putting some of the money in savings.
Andy adds: ‘If you did a budget as part of the process of clearing your debts, you may find that if you base your new budget off your old one, you will have a large surplus at the end of the month which would otherwise be used to pay off bills.
‘We’d highly recommend putting at least a portion of this towards savings, which can greatly reduce the risk of falling into problem debt again – but be realistic and do make sure to keep some of your new surplus to enjoy yourself!’
Using the extra money to save is a good idea because it means you can create some emergency savings.
If you find yourself in a situation where you urgently need some money, like if your car breaks down or you need a deposit to rent a new flat, dipping into your emergency fund is a much better idea than having to borrow money.
Set yourself a goal and set aside that money as soon as you get paid every month.
Improve your credit rating
Your credit rating will not be good if you have had any debt payment support like a debt payment plan or IVA. These will stay on your file for six years and will impact on your credit rating.
Even if you haven’t used one of these services, it will note if you have had any defaults on your debt.
Over time these will drop off and as long as you don’t fall into old habits, your credit rating will improve.
There are some things you can do to improve your credit rating as soon as possible:
Make sure your credit file is up to date
Read through your report and make sure that anything that isn’t right is corrected.
You can speak to the company who put something on your credit file and ask them to correct any mistakes, or if they refuse you can ask the Information Commissioner’s Office to look into it.
If there is something that is correct but you feel it needs some more explanation, you can add a ‘notice of correction’, which will be visible ot anyone checking your credit history.
Adding yourself to the electoral roll if you aren’t already on it can also help your credit score as it is used to verify your details. It also means you will be eligible to vote.
Start applying for credit again – but use it sensibly
Once you are completely debt-free, you can apply for credit again and this does help you build up your credit score by showing you can make consistent payments.
Only apply for credit if you are sure you can pay it back. It’s a good idea to use it for some usual spending like a regular bill but make sure it is paid off in full every month. Set the money aside to pay it when you get paid.
Never apply for more than 50% of the credit that is available to you and spend small amounts.
Don’t apply for lots of credit at once either – having lots of applications can make you look desperate and make your credit rating worse.
You can use MoneySavingExpert’s eligibility checker to see how likely you are to be given a credit card before you apply. Searching through this checker won’t impact your credit score
Don’t fall back into bad habits
Recognise when you were overspending and if you feel you are slipping into your old ways, take a step back and talk about it with someone who understands your financial situation.
Most debts build up and people ignore them until they are unmanageable. Don’t let that happen again.
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