Guide to Dealing with Debt

Debt is a mess that only you can clean up. It’s a common problem that doesn’t require financial wizardry, expensive advice or an appearance on the BBC’s Your Money or Your Life, just common sense and self-control.

The charity Consumer Credit Counselling Service says that a simple rule of thumb is to add up all your monthly credit commitments, excluding mortgage payments. If this totals more than 20% of your net monthly income, you are over-extended and need to cut back.

Where to begin?

Before managing your debt, you must know exactly how much you owe. So, work it out. Being dishonest with yourself will only lead to further problems in the future. Ignoring the subject will not make it go away. If at any time you think you will be unable to pay a debt, contact your creditors immediately to discuss the matter. Always go through your bank statements and other relevant correspondence carefully.

The first steps

First, prioritise your debts. Mortgage/rent payments are most important because they can lead to loss of your home if they are not kept up to date. Switching your mortgage – which is likely to be your single biggest monthly expense – is an option to consider. An independent financial adviser or a broker can advise you about your re-mortgaging options and whether a switch could save money.

Utility bills are vital, too. You won’t be able to lead a normal, comfortable life if your water and electricity have been cut off. Switching to energy suppliers that offer more competitive rates can save hundreds of pounds every year. Paying by direct debit helps to avoid the worry of sending cheques on time, and some utility providers offer discounts to customers who pay using direct debit.

Credit cards

The second thing to do is not borrow any more money and to destroy all credit cards and store cards. The interest charged by shops’ cards – often as much as 30% - can lead to an endless chasing of debt that builds and builds if you pay only the minimum or a minimal amount each month.

At the very least, have your credit card company drastically reduce your spending limit, and shop around for a card with a better rate than you are paying – especially on transferred balances. Be wary of special-offer rates that will rise considerably in six months’ time.

Saving

Saving money and budgeting may seem like obvious steps to take, but they can only be effective if done in a regimented and efficient manner. Work out how much of your debts you can afford to repay each month and how much you need to live. Put some money aside – even a small amount – for unexpected bills and other expenses. Withdraw a set, affordable amount of money from the bank at the beginning of each week, and give your ATM and debit cards to a friend or family for safekeeping.

Look for a bank that offers the best rates on your overdraft. High street banks often don’t always offer the best deals, which can be got from one of numerous internet banks, such as those listed in our Online Banking section (www.uknetguide.co.uk/Finance/Banks_and_Banking/Online_Banking.html).

Debt collectors

Be wary of heavy-handed tactics often employed by debt collection agencies. These might include sending you fake county court papers and threats of sending in the bailiffs. If you are sent county court paperwork, check whether it has been stamped. If it hasn't been, it means the papers have not been presented to the court yet. Bailiffs are generally only used as a last resort.

And finally…

Be prepared for the long haul back into the black. Dealing with debt is not an overnight exercise, but it can be managed with attention and discipline. Bankruptcy is very much a last-ditch option. It may mean that overwhelming debts are officially declared void, but it is extremely disruptive to your life. Your home may be sold in attempt to satisfy creditors, and you will be greatly restricted for at least three years (sometimes two) when opening a bank account, obtaining credit of more than £250 and running a business.

Advice on debt is available free of charge from many sources, including the Consumer Credit Counselling Service (www.cccssecure.co.uk), the Citizens’ Advice Bureau (www.nacab.org.uk), money advice centres and debt counselling services. Think Money (www.thinkmoney.com) provide a range of debt management solutions in the UK. Also take a look at our list of links to useful Debt Consolidation Advice and Debt Management sites (www.uknetguide.co.uk/Finance/Loans_and_Finance/Debt_Advice.html).

 

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