Debts out of control? Here's what you can do
Costs are soaring and times are tough, but there are ways to fix your finances. Here's how, says James Daley
Saturday 10 May 2008
Rising food prices, soaring fuel costs and higher borrowing rates have started to put the squeeze on British households over the past few months. For many families, these sudden sharp rises have forced them to cut out life's luxuries – and even then, some are still struggling to meet debt repayments and are at increasing risk of default.
If you're finding it difficult to keep on top of your debts, however, the earlier you take some action, the more likely you are to avoid getting into serious difficulty. Services like the Consumer Credit Counselling Service ( www.cccs.co.uk) and Citizens Advice ( www.citizensadvice.co.uk) offer free advice, regardless of how bad your situation is. You might consider these points.
Pay less interest
If you're still just about managing to pay your debts but think you're running into trouble, the first step is to make sure you're getting the best possible deal on your loans and credit cards.
Although the credit crunch has meant that it's harder to get your hands on new loans and cards than it was a year ago, there are still a number of 0 per cent balance transfer credit-cards on the market – some which remain interest-free for as long as 15 months ( see table ).
If you're holding a balance on one or more cards – and paying just a little bit back each month – the chances are that you'll be paying an interest rate as high as 19 per cent APR. If you can transfer these to a 0 per cent card for a year, you could save hundreds of pounds in interest – and you'll also give yourself the chance to cut back on your monthly repayments while you get on top of your finances.
David Black of Defaqto, the financial analysts, warns that if you do take out a balance transfer credit-card deal, it's imperative that you don't do any additional spending on the card – as this will start to accrue interest.
If you can't get your hands on a 0 per cent credit card, it may still be worth taking out one large loan to pay off all your other debts – if you can secure one at a reasonable rate.
The best personal loan rates on offer at the moment are under 7 per cent APR. However, Black warns that these are really hard to come by. "If you see a good rate advertised, the lender must make it available to two-thirds of successful applicants," he says. "However, loans that appear in the best-buy tables tend to have a much higher rejection rate."
So you may still be forced to continue holding your debt on a credit card with a high interest rate. If so, says Frances Walker of the Consumer Credit Counselling Service, it's important to pay down more than the monthly minimum. "If you borrowed £2,000 on a credit card and just made the monthly payment each month, it would take you 20 years to pay off your balance," she says.
If you can, pay more money towards your higher-interest-bearing debt each month – such as credit cards and store cards – as this will work out cheaper in the long run.
Be wary of TV debt adverts
If you're ever at home in the daytime, it's hard to miss the endless stream of debt-consolidation adverts shown between the programmes. Although these can be useful for a small number of people, Frances Walker warns that, in 90 per cent of cases, people will be better off pursuing alternative solutions to their debt problems. "Nine times out of 10, we don't think these are a good deal," she says. "For a start, you are turning unsecured debt into secured debt – so you are putting your home at risk. But they may be suitable for a small number of people who have a lot of equity in their homes."
Be sure to budget properly
Walker says that, although it may seem an obvious point, the most important step for people in debt difficulties is to come up with a clear budget plan that they can stick to. Websites such as www.moneymadeclear.fsa.gov.uk have budget calculators that can help you to plan your finances. If you are already in real difficulties, services such as the CCCS can help you to draw up a realistic budget and can negotiate some leeway with your creditors.
Talk to your lenders
If you need to take a month or two off paying your debt, then it's always worth talking to your lender. In many cases, they will be happy to give you a few months leeway – as long as they are convinced that you are still committed to paying off your loans.
If you've got a large number of creditors, the CCCS can talk to your creditors for you and can arrange for you to make a small payment each month, which will be split among the creditors. Usually, they will also get them to freeze interest on your loans.
If you have a total of more than £15,000 in debts, you may qualify for a plan known as an Individual Voluntary Arrangement (IVA), which will see a proportion of your debts written off and the remainder consolidated into a single plan, with one manageable monthly payment.
There are a number of private companies that offer these, but the CCCS and Citizens Advice should be able to advise you as to whether this might be a suitable route in your case.
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