|
| Personal finance articles |
|
|
|
How to kiss your debts goodbye
By Hannah Ricci
We all deserve to treat ourselves occasionally, but if you're funding your lifestyle with credit cards and loans or living in your overdraft you'll be much better off using any end-of-year bonus or pay rise to start paying off your debts and developing a healthy savings habit.
The problem is that 'buy now, pay later' has become an accepted part of life and banks and credit card issuers are falling over themselves to lend us money. So, rather than saving up for life's luxuries - we slap them on credit cards. And when it comes to big-ticket items like sofas, cars and home improvements we use loans and hire-purchase agreements.
The never-never
While you may be managing repayments now, living on the never-never is risky. What would you do if you lost your job or fell ill? As our addiction to debt grows more people are coming unstuck. The Citizen's Advice Bureau reported an 11% rise in the number of people seeking debt advice in England and Wales last year - that's a staggering 1.4 million people.
Research from debt solutions consultancy Thomas Charles also shows that some 2.5 million adults are struggling to repay debts - an increase of 21% over just six months. "If action is not taken to curb borrowing trends in the UK, the situation is likely to spiral," says James Falla, managing director at Thomas Charles.
Manage your debts
So before you hit the shops, take the time to get a better picture of your debts and work out whether your borrowing is manageable or out of control. Research from individual voluntary arrangements specialist Money Debt & Credit found most people underestimate the severity of their debt by up to 30%.
Joel Lewis, spokesman for the Consumer Credit Counselling Service (CCCS), says you should start by measuring the level of your debt. "Add up all your monthly payments for unsecured debts. If this is more than 25% of your take-home pay, you need to seek advice," he warns. "Similarly, if you can only afford to make the minimum repayments on any credit cards, alarm bells should start ringing, because making minimum payments on a balance of £2,000 could take 25 years to pay off."
Another warning sign is borrowing to pay off debts: "Robbing Peter to pay Paul is a clear warning signal that your finances are out of control," says James Falla. In addition, you need to be wary if you use credit cards to pay for bills and essentials like food shopping.
Even if you don't have formal debts like loans and credit cards, take a look at your bank statements. "Living in your overdraft every month is a sign you need to sort your finances out," adds Falla.
Act now
If all this sounds familiar you should act immediately - going through the processes outlined in the first part of this feature is a great place to start. "Write down your income and your essential expenditure, then separate this into living expenses such as food, travel, bills and rent or mortgage. What's left over is disposable income and should be used to repay debts before anything else," says Falla.
Joel Lewis adds: "Start by prioritising unsecured debts and pay off the most expensive ones first." Costly store cards should be paid off and cut up.
Next turn your attention to any credit cards. "If you put Christmas on a credit card, you should be aiming to pay it off within two to three months," says Lewis.
You could switch your credit card to another 0% card to give you some breathing space, but Lewis says you shouldn't rely on these cards. "The number of cards with 0% on balance transfers is falling, and many charge a balance transfer fee.
Now turn your attention to any personal loans and overdrafts. While it's vital to pay back your credit cards as soon as possible, it shouldn't be at the expense of more important debts, explains Lewis. "Always prioritise your mortgage and utility bills."
Seeking help
If no amount of cutting back will help and you can't meet repayments, it's essential to seek professional advice as soon as you can from a debt charity such as CCCS (cccs.co.uk) or Citizen's Advice (citizensadvice.co.uk). Providing you're open about the amount, advisers can help you prioritise your debts, work out a budget, negotiate with your creditors, and formulate a repayment plan. This may be enough to help you step up your repayments and clear your debts. If it's not, they'll also be able to talk you through alternative debt solutions such as debt management plans, individual voluntary arrangements (IVAs) and bankruptcy.
An IVA is a less scary and restrictive alternative to bankruptcy. It's an agreement between you and your creditors to repay a percentage of the debt over the life of the IVA, usually five years, under the watchful eye of an insolvency practitioner. At the end of the IVA, any outstanding debt is usually written off.
IVAs, however, should not be seen as an easy way out. Although you may not have to sell your home or business, you may have to release some of the equity in it at the end of the IVA. Creditors may also require you to cash in releasable assets.
Conclusion
Solutions, such as debt consolidation or loans secured on your home, rarely solve debt problems. Careful budgeting and a sensible attitude to spending is a far easier - and safer - way to get out of debt, and will also help form good money habits. Once you're debt-free you can redirect the monthly outgoings into a high-interest savings account, so the next time you see something you really can't do without, you can treat yourself without borrowing and storing up problems for the future.
Debt in numbers
51% of 16 to 24 year olds delay payment on debts (Mori)
2006 graduates left university with an average debt of £13,252 (NatWest)
One in five adults have personal debts of more than £10,000 (Thomas Charles)
One in three women with debts in excess of £10,000 is struggling with repayments
The 'typical' IVA customer has debts in the region of £20,000 to £35,000 (Money Debt and Credit)
3.4 million credit card holders in the UK make only minimal payments each month (Carrington Dean)
2.5 million Brits report regular problems repaying their debts (Thomas Charles)
One in three people lie to their partner about what they spend on a credit card (Carrington Dean)
Useful links:
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View