Find out the steps to take to get on top of your debts.
Are you worried by your debts? In the latest of my monthly guest posts from subject specialists in my UK Money Bloggers community, I’ve asked Sara from Debt Camel to hopefully make things a little clearer.
Thanks to her 15+ years of volunteering for Citizens Advice, Sara set up her blog and has become a champion for those in debt. In this article she shares the basics you need to cover if your debts are becoming more than you can manage.
You and your debt
Sometimes a debt problem happens if you lose your job or have a business failure, but for many people it’s not so dramatic, things just get a bit worse every month.
Costs go up, your income doesn’t, so the electricity bill gets paid with your credit card. Next month making the minimum payment to your card takes you over your overdraft limit, but payday brings you back down… for a bit…
If this is happening to you, your debts are getting out of control. You may be able to muddle through for a few more months, but each month you are borrowing a bit more. Pretty soon the only new credit you can get will be very expensive – and you don’t want to go near payday loans, logbook loans or guarantor loans.
The sooner you can halt this drift downwards into more debt the better. So here are the practical steps to take:
Look at the debt numbers, even if they are scary
On my website I call this “taking a financial selfie”. You don’t want a beautiful, posed and photo- portrait, you want a record of how things actually are.
Start with those debts – make a list of them all! Not just the credit cards and loans, but also catalogues, car finance, overdrafts, even your mortgage.
Top tip: If you aren’t sure you have a complete list, look at your credit records.
Priority debts are things like mortgage, rent arrears, council tax, utility bills… They are a priority because bad things can happen if you don’t pay them, from losing your home to being sent to prison. The interest rate on that catalogue may be horrible but you won’t get sent to prison if you don’t pay it!
There is a complete list of priority debts here – use that to sort your debts into two groups
For the non-priority debts, you want to know how much you owe and what the normal monthly repayment is. Add these up – you will need the numbers later.
For the priority debts, you want to note down how much you owe, what the normal monthly repayment is, whether you are behind with any payments (“in arrears”) and if you have already sorted out a repayment plan (£x per month) for these arrears. If you have any priority debt arrears where you don’t have an arrangement in place, you need debt advice on how to deal with them, see below.
Get a first draft of a budget
I suggest you use this budget calculator – it lists things you may have forgotten and converts everything into “months” which is useful if you get some benefits fortnightly or for the once a year bills.
This calculator is mainly aimed at people who need a debt management plan, but don’t worry about that for the moment. Make sure you save them so you can come back to them later.
Top Tip: If you have a partner, get them involved.
There is a bit of knack to putting the numbers in. It’s OK if the figures are rough but not if they are hopelessly optimistic – putting zero in for everything you don’t often spend money on isn’t going to help. Having a look at your bank and credit card statements for the last few months is useful.
At this point you are trying to record what you actually spend, not what you think you ought to. But if you spot you have a standing order that isn’t needed anymore then stopping that is a quick win!
How bad does it look?
So now you have some data, not perfect but good enough to give you an overview. Ignore the details and write down the following five numbers:
- income from the calculator
- expenses from the calculator – this includes normal monthly payments to priority debts such as rent and council tax. But it excludes any payments to your non-priority debts.
- money available for debts – this is income minus expenses.
- priority debt repayments – these are any extra payments you have arranged if you are in arrears.
- non priority debt payments – the total amount you should be paying each month.
Top tip: if the numbers don’t feel right, you may have missed something out in the budget calculator, or perhaps you put what you spend on food in a week in as the monthly amount?
Now is the money available for debts enough to pay your priority and non-priority debts?
“Caught the problem in time”
If there is enough money to make the debt repayments, you have caught your debt problem in time. Your debts may be uncomfortably large and they may be restricting your lifestyle or stopping you from saving a house deposit, but you don’t yet have a debt crisis.
From here a combination of good budgeting, a few cutbacks and seeing if you can refinance any expensive debts will get your finances back on the road to recovery. Read up about Snowballing – it’s the way to clear your debts as fast as possible and get a great credit record.
“Not quite enough”
If there isn’t enough but it doesn’t seem that far away, then look for improvements to your budget. Fewer takeaways, switch your utilities, cancel the gym membership, change to SIM only when your mobile contract ends … find some ways to save that extra £70 a month. They may be uncomfortable, but the longer you leave it, the worse your position gets.
“Not close at all” – get some debt advice!
If the numbers suggest you are several hundred pounds short, then making a few lifestyle changes probably isn’t going to be enough. Getting some debt advice could really help you here – although there are some “DIY” debt management options, it’s always good to have discussed your situation with an expert first.
Getting debt advice is especially important if any of the following apply:
- you have priority debts;
- you think your situation may be changing, so you may need a temporary option for a while;
- you owe so much you can’t see how you can ever repay it all.
Where to go depends on whether you would prefer face-to-face advice, telephone advice, where you live, whether you are self-employed etc. Check out Debt Help Contacts to see my suggestions – they are all reputable organisations who don’t aim to make money from recommending some debt solutions.