Roll-over debt

Definition: paying off one debt with another creditor who is going to charge less interest

A client asked me how he could save a tiny sum each week to afford a new phone in three months. His figures were very detailed and carefully kept. This guy was really working it, it was such a pleasure to see what he was doing.

We looked at his spending, which seemed balanced and clear, and then looked at his earning which was set to go up in the New Year on top of a Christmas bonus. All good.

Then we looked at his debt, which again was clear and detailed. He had a list of debts, who they were to and how much interest he was paying on each one. The interest was very high, just under 10% for each one, and he had been managing to pay it and some of the capital for quite a while.

This is where roll-over debt comes in: paying off one debt with another creditor who is going to charge less interest.

Sometimes we can owe someone we know, family or friend. This is what I call "emotional interest": a debt that is heavily charged with emotion. Again this can be rolled over into a debt with an institution where there is no emotional interest and at the moment, not much financial interest.

So you can take a debt to a credit card company for maybe 10% interest and get another creditor for less, or maybe even no interest. Then we can start paying back more of the debt because we are no longer paying any interest.

As long as the debt is not increased, it will be fine. Living with your debt and paying it off slowly is the learning exercise. But you can't do this if you borrow more money.

Make sure the new creditor doesn't set a payment rate higher than you can pay back. This is a real way to get into a worse mess. This guy had a few months of records to show what he could easily pay and carry on a good life.

So I suggested switching his high interest debt into a new low interest debt, as long as he did not increase it. This would not only make things much simpler with one creditor but also allow him to pay off the debt faster with the same payment.

With the small amount of money left over from his figures, we worked out that he could buy a new phone in three months, or look at a second hand phone in one month.

This allowed him to put the remaining money into a savings account. As he had no savings at all, he could be vulnerable if there was an unexpected cost, where he might be tempted to borrow again.

Having some savings to start off as soon as possible is essential as part of the process of learning to live without debt.