Dealing with Debt

The purpose of this guide is not to judge, if you are in financial trouble you no doubt already feel judging eyes upon you (whether or not they actually are). Our aim is to give tips on how to get yourself debt free; or at the very least, point you in the direction of people who can help.

1. Admit your debt to your nearest and dearest

It can be the hardest thing to do – particularly to a spouse or partner – but if your debt is spiralling out of control they will find out eventually, so better to confess whilst the problem isn’t as bad.

They say a problem shared is also a problem halved and you’ll be surprised at the level of ease it gives you to vent.

Friends and family may not be able to help materially by settling the debt for you, but they might be able to help out emotionally or in practical ways (such as looking after the kids while you work a second job).

We’re not saying it won’t be difficult, but ultimately not coming clean will be more difficult in the long run – don’t isolate yourself.

2. Analyse your debt and your budget

Work out how much money you have coming in and what you’re spending it on using a piece of paper, a spreadsheet or an online budget planner like this one from the Money Advice Service, itemise the following:

• Your income (wages, maintenance payments, benefits, etc.)
• Your outgoings (mortgage, council tax, utilities, TV licence, all of your debts, insurance).
• Total up both amounts.

Do your outgoings exceed your income?

If the answer is YES, you need to cut, cut, cut! Be brutal with yourself.

On the piece of paper cut out any non-essential expenditure and re-total. If possible try to involve someone outside of the situation to help you with this, such as a straight-talking friend or a debt counsellor (see useful links at the end).

3. Cut essential costs

Look at areas where you might be able to reduce costs.

Are you getting the best price for your car insurance and home insurance? 

What about switching your gas or electricity supply to save on your monthly bills?

Often, as well as saving money, you can earn money through cashback for switching – so plough these savings and earnings straight back into repaying your debt.

4. Repay your debt more efficiently

If you have credit card debt, an overdraft or store cards, etc. and have not yet missed a payment, a good place to start is to see if you can get a long 0% balance transfer credit card.  Remember some credit card companies also charge a balance transfer fee to take over your outstanding debt.  Make sure you know how much the balance transfer fee will amount to. 

If you don’t trust yourself being disciplined to make the monthly payments, set up a standing order or consider taking out a personal loan. By having your payment taken each month automatically, you don’t have to do anything – apart from watch your debts shrink!

Make sure you know the interest rate charged on each of your debts.  If you have store cards (cards that you can use in certain shops to pay for goods over a period of time), these usually offer a discount or a free gift on your first purchase, but can be more expensive than credit cards, so, transferring store card debt to a credit card with a lower interest rate might help you get it repaid sooner.

Read more about store cards:
Guide: Who's the lender - UK store cards
Guide: Should I take out a store card?

5. Must have versus I want

It’s far nicer to buy things than pay for them, isn’t it?  Try to focus on the must have's rather than what you want.

Repaying debt can seem boring, and you may feel like you aren’t getting anywhere. This is the part where discipline is important, and where you might feel like some comfort shopping will break the monotony.

If you want something you can't afford, think what else that money could buy: a week's groceries, a month's rent, or a weekend away. That will put things into perspective.

6. Be strong!

Look at repaying debts as “reverse saving”.

Instead of saving up for something and then buying; you have bought and then have to save up. The interest you pay is the price of having the money earlier.

When you look at repaying debt as saving, rather than paying, you can really feel better about the positive effect you are making to your personal finances.

• Where possible, set up standing orders to repay credit cards for the day after pay day so you’re not tempted to spend the money.
• Cut up your store cards and credit cards so you’re not tempted to put anything on them.
• Bin any catalogues you have as well!  Mail order catalogues offer a way of buying goods by post and spreading the payments over a period of, typically, 20 to 40 weeks. But you should treat catalogue debts as ordinary credit debts and get rid of them!
  

7. Talk to your lender

If you’re struggling with repayments, it’s always best to let your lender(s) know as soon as possible. 

Try to negotiate a more manageable way of repaying your debt. 

At the end of the day, your lender wants the debt repaid as much as you do, so showing willing and communicating will go in your favour.

8. Choose the right debt solution carefully

Don’t go for the first debt solution that presents itself.

Worrying about debt, like any stressful situation, leaves us vulnerable.  Under pressure, your decision-making can be impaired – just when you need it to be at its best.

Try to stay calm.  Work out whether you are in debt crisis which means you are struggling to pay your monthly bills (mortgage, rent, utility bills, etc) or just have large debts which means you have a debt problem.

If you just have debt worries, it's all the more important then, not to take a debt solution such as an Individual Voluntary Agreement (IVA), a Debt Relief Order or bankruptcy without getting proper, independent debt advice first.  These types of debt measures are designed for those with few alternatives.

It doesn’t have to cost anything and there are organisations out there to help you. 

Have you considered contacting a local credit union?

In the past credit unions were constrained by rules which meant that members had to have something in common, such as living in the same geographical area or working for the same employer.

As of January 2012 credit unions will have these restrictions lifted.

Under the new powers, credit unions will be able to:

• extend membership to more than one group of people, no matter where they live or work
• pay interest on deposits, instead of a dividend
• offer their services to businesses and community organisations, as well as individuals.
  

Read more about credit unions:
Guide: What are credit unions?
Blog: Credit where credit’s due

These changes will allow credit unions to provide a more effective alternative to high street banks on the one hand and high cost lenders and loan sharks on the other.

Such an offering could scarcely come at a better time; currently there is a situation where people not judged suitable for credit by the banks have to choose between not borrowing, doorstop lending, short-term loan companies or, even worse, loan sharking.

Useful Links
Here are some links to some free organisations that can help you deal with debt:
	ABCUL - Association of British Credit Unions (ABCUL) - find out what your credit union can do for you.
	StepChange Debt Charity StepChange (CCCS) is a charity that helps over 350,000 people across the UK overcome their debt problems by offering a debt advice and counselling service.
	Citizen’s Advice Bureau (CAB) provides free debt counselling.
	Debt isn’t just a financial problem; it’s an emotional one. If you can’t, or don’t want to speak to family and friends, the Samaritans have lots of experience helping people through financial difficulties.