The number of people with serious debt problems is rising sharply. More than 3,000 people were declared bankrupt in 2006 owing more than £100,000 each in unsecured loans. Recently
the Consumer Credit Counselling Service, one of the UK’s largest debt
charities, warned that the number of people owning more than £100,000
has almost doubled over the past two years.
At the same time Government figures show that the number of people filing for bankruptcy has risen to record levels for the third year running. In total Brits now owe a whopping £1trillion – and much of this rising debt mountain has been fuelled by a boom in credit cards, store cards and personal loans.
If you are one of the thousands of consumers who are concerned that your spending is getting out of control, then help is at hand. Our debtbuster guide is designed to help you put your finances on back on track. Follow the five points below and you should manage to stay clear of more serious debt problems, which can lead to insolvency or bankruptcy.
Step One: Identify the problem
The first step is to face up to the fact that you have a debt problem. The longer
you leave it, the larger these will be and the harder it will be to get your
finances back under control.
First calculate exactly how much you owe. Make a list of all your various debts and find out exactly what interest rate you are paying on different loans, credit cards, store cards, mortgages etc. This will help you identify the most expensive debts, which need to be paid off first.
It is also important to understand why you have become saddled with a debt problem. Are you in the red because you regularly spend more than your earn each month, and use credit cards and overdrafts to bridge this gap? Or maybe a one-off purchase has stretched your finances a bit too far? Perhaps a career change, divorce, unemployment or illness have reduced your income? If you know why your spending has spun out of control, you are in a better position to draw up an effective plan of action, and there is less chance of falling into the same trap again in future.
Step two: Reduce borrowing costs
You want to pay as little interest as possible on any outstanding debts, so
pay off the most expensive debt first. It is best if this can be done from savings
or your salary. If this is not possible you may want to look at taking out cheaper
credit, for example a low-cost personal loan or a zero per cent credit card,
to pay-off more expensive debt. Savvy consumers will shop around to ensure they
are getting the best deal on loans, credit cards and overdrafts.
However, moving debt around comes with a several health warnings. If you are repaying an expensive loan, ensure there are no early redemption penalties. Remember taking loans over longer periods may reduce monthly repayments, but it will increase the total amount of interest you pay. Short term gain can spell long term pain.
It goes without saying that if you are taking out a loan to repay a credit card or store card debt, then always, always, always cut up the offending piece of plastic. If you don’t, the temptation will be to start spending on it again, and before you know will be juggling your new loan repayments with an ever-growing monthly credit card bill.
Similarly tread carefully with low-cost or zero per cent credit cards. By all means use cheap balance transfer rates on offer to pay off existing debt, but on no account go on a shopping spree with your new card, however attractive the interest rate. Before you know it the “introductory” period will be over, interest rates will have soared skyward and your debts will be larger than ever.
If you are the kind of person that can’t walk by a shop window without feeling an itch to get your wallet out , then don’t apply for new credit cards, cheap loans or extended overdrafts – however cheap the rates on offer. Rather than “shuffle” debt around, concentrate instead on making repayments on existing debts and cutting spending.
Step Three: Reduce your expenditure.
Its tough, but you have to rein in your spending if you want to wave bye-bye
to spiraling debts. A recent survey by Bradford & Bingley claimed that 30
per cent of Brits said their salary was not enough to live on. You may have
muttered similar things yourself in the past while paying for the latest electronic
gadget, essential wardrobe items or dream holiday on credit. But it is time
to wake up. If you don’t live within your means you are going to end up
with horrendous debts and no way to repay them.
The easiest way to control spending is to budget. Start making a log of where your money goes – fishing out the last few month’s bank statements can help. Think about what is necessary and where you can save money. Set yourself a monthly spending allowance and – this is the difficult bit - stick to it. You may also want to start thinking about negotiating a pay rise.
Step Four: Get free advice
Those with serious debt problems need advice. But be extremely wary of many
of the debt counseling services currently being advertised. Most of these are
commercial operations that are interested only in selling you more credit or
charging a fee to manage your debts. They do not provide independent advice
and can end up costing you an arm and a leg.
However, there are a number of helplines and advice services available. All
will listen to your problem and suggest constructive steps you can take to get
on top of your debts. They are: the Consumer Credit Counselling Service: (www.cccs.co.uk)
0800 138 1111; The National Debtline (www.
nationaldebtline.co.uk) 0808 808 4000 and Citizens Advice - the address
and phone number of your local branch will be in the yellow pages.
Step Five: Keep in touch with your creditors
If you have reduced borrowing costs and cut spending but are still struggling
to repay your debts then talk to the lenders involved. Tell them you are having
difficulty keeping up with repayments. In some cases lenders may be prepared
to help, perhaps freezing interest on the debt or lowering monthly repayments.
After all most banks would prefer it if they at least recoup some of their money,
perhaps over a longer period of time, than have you go bankrupt which could
mean the debt being written off altogether.
However, while you are talking to them don’t stop making minimum repayments. Similarly don’t avoid the issue by ignoring calls or letters from your bank or credit card company. This will set alarm bells ringing and your creditors who are likely to take drastic action – such as calling in the bailiffs.
