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Financial Debt

FINANCIAL DEBT

1. Don’t ignore the problem

While leaving bills and bank statements unopened can make things a little easier to face short term, it’s really only making the situation worse. Facing the problem head on is the only way to stop your debts from spiralling out of control and while this may seem a bit intimidating, it’s got to be done if you want to work towards becoming debt free.

2. Make a debt-escape plan

Making a plan will give you focus and help you know understand exactly where you are financially. You will need to work out what your debts are, how much they’re costing you and how much money you have available to repay them.

Firstly, work out how much money you have coming in each month. Include your regular wages as well as any benefits, child maintenance or any other income you receive.

Next, you’ll need to work out all of your outgoings, including ‘essentials’ such as your mortgage, outstanding debts and food as well as more ‘luxury’ spending.

It is important to be realistic about these figures as, when making a plan to pay off your debts, it’s always best to work to a ‘worst case scenario’ where you balance the lowest possible amount of income you’re likely to have coming in against the largest outgoing you’re likely to have, this way you’ll never be caught short.

After you’ve made a list of your incomings and outgoings you’ll be able to identify how much money you have available to pay off your debts and where you’re able to cut back and make savings on your current spending.

Once you’ve compared these figures don’t be too alarmed if you have more money going out each month than you have going in. The point of this exercise is to get a realistic view of your finances and identify what needs to change. Good or bad, once you know where you stand you’re in a position to do something about it.

3. Prioritise

Now you have a list of all of your commitments you will need to prioritise them. Give precedence to essential payments such as your mortgage, council tax and any secured loans; keeping a roof over your head is your number one priority. Utility bills, food and unsecured loans should come next in line, with ‘luxury’ items such as satellite TV, nights out, shopping sprees and home improvements sitting at the bottom of the liste.

4. Cut back

If you’re serious about paying off your debts, making some cut backs is going to be necessary.

As it’s so easy to spend money without thinking about it keeping a spending diary (in which you write down everything you buy, no matter how big or small, for at least a week) can really open your eyes as to where your splashing out unnecessarily.

Little things such as taking a packed lunch to work rather than buying food every day, sharing lifts to save on petrol and parking or going for a run or bike ride rather than shelling out for an expensive gym membership can make a big difference to your finances.

By cutting back on the non-essentials, at least for a little while, you’ll have more money to put towards clearing your debts and more importantly, you won’t need to take on any additional borrowing.

5. Pay on time

Whenever you’re late with a payment, default completely or go over your credit card or overdraft limit you’ll usually be charged an elevated rate of interest and a penalty. These fees quickly add up so it’s important to try and avoid them at all costs.

Arranging to make payments by direct debit just after you get paid can help prevent unnecessary fees by ensuring that the money is available to go out of your account, and that it does so on time.

However, if you’re not going to be able to make a payment for whatever reason it’s important to contact your lender and explain your situation. If you’re up front and tell them that you are struggling they may be more lenient and willing to negotiate a payment holiday or the opportunity to reduce your monthly payments. Whatever the situation it’s always better to let them know.

6. Re-jig your debts

By reducing the amount of interest you pay on your debts you will not only make your commitments cheaper but will also have more spare cash to re-direct back towards clearing your outstanding balances.

Credit cards

Take a look at your credit card statement; it should detail the rate of interest you’re currently paying. In all probability it’s around 15% or, if you’ve spent on store cards, anywhere up to 30%. When you consider that paying interest at this rate means that your purchases are costing you almost a third more than their retail price, it puts things into perspective a little.

Your aim should be to reduce the amount of interest accumulating on your credit cards to as little as possible and thankfully there are a huge number of balance transfer credit cards available to help with this.

When it comes to making your credit card debt cheaper you really have two options. You could either move the outstanding to a credit card that offers an interest free balance transfer (opting for one with the longest period possible). This is an attractive option although you will need to weigh the cost of balance transfer fees and the likelihood that you’ll need to switch again after the initial offer expires into consideration. Alternatively, the other option is to move your debt to a card that charges a discounted rate (usually 5-7%) until your balance is paid off. With this type of offer, while you will still be paying interest, it will be at a greatly reduced rate and you are unlikely to incur any fees or charges when you move.

Check out what  the best balance transfer offers currently available check out  0% balance transfer credit card comparison tables.

Loans

If you have committed to a fixed rate loan, whether it’s secured or unsecured, it’s unlikely that you will be able to move to a cheaper option without incurring a cost. However, this is still an option worth considering. Visit our loan comparison tables to compare your current loan rate with some of the best deals currently available.

When working out whether you could save money by moving your loan you will first need to contact your loan provider and find out how many monthly payments and how much of your debt you still have outstanding. It’s also essential that you find out what the penalties are for early repayments.

Once you have this information you’ll be able to add these figures up and use it as a starting point against which to compare other loans. If nothing works out cheaper that this amount it won’t be worth your while switching.

Mortgages

This is likely to be your biggest expense so if you can save money on your mortgage it could make a big difference to the amount of money you have available to tackle other debts.

If you’re currently paying your lenders standard variable rate (i.e. not tied into a fixed deal) you could be shelling out unnecessarily and looking to remortgage could be well worth your while.

First of all it pays to take a look at mortgage comparison tables so that you have at least a basic idea of the different types of deals available. It then pays to go back to your current lender and ask whether they are able to offer you a better rate. This can be a good option as you won’t need to pay out for any of the repayment, application or legal fees associated with remortgaging.

You’re not however guaranteed that this is the best deal so a remortgage is still worth investigating. It can be a good idea to speak with an independent mortgage advisor who will be able to explain your options and help you to work out the cost of moving your mortgage. Remember this is only worth doing if you can save money.

If you are tied into a fixed deal its unlikely that you will be able to save money by moving your mortgage as the penalty fees are likely to outweigh the benefits of switching to a better rate. However, making a note in your diary as to when your current deal ends is essential.

7. Don’t borrow more

Despite what the glossy TV ads say, consolidation loans aren’t always the best solution especially if, as they suggest, you borrow more to ‘treat’ yourself. That’s not to say that they are never a good idea as they can be appropriate in some circumstances.

It is however important to avoid consolidating any unsecured debts (such as credit cards, overdrafts or loans) into a secured debt as this will put your property on the line meaning you have a lot more to lose if you can’t afford to meet the repayments.

For a more detailed explanation on the pros and cons of consolidation loans Is Loan Consolidation Really the Answer?

8. Cut the cost of essentials

Once you have reduced the cost of your debts, wherever possible you should look to make savings in other areas of your life. The cost of running a household is significant and you could make substantial savings by making only small changes.

It’s worth checking whether switching your energy supplier, reviewing your landline, mobile and broadband packages or even downgrading your satellite TV could save you money. Insurance is another area where you can make big savings for relatively little effort so shopping around and comparing quotes is well worth doing.

9.Put your savings towards your debts

After giving yourself a ‘financial detox’ by switching to cheaper financial products and cutting own on your spending you should have freed up a little extra cash. So, rather than treating yourself for being so good it’s important to plough this right back into your debt.

By putting as much money as possible towards paying off your debts each month (obviously where overpayments are allowed!) you’ll be in a position to clear your debts much sooner than was previously possible.

10. Stick with it

Once you’ve got this far you’re on the path to becoming free from your debts; you know what you have to do and how to do it. However, the hard part isn’t quite over yet.

You will need to keep on top of things to make sure that you reach your ultimate goal of clearing what you owe completely. It won’t always be easy and can seem like you have a long way to go but once you have a plan in place and get into the practice of thinking before you spend things can seem a lot more manageable than they feel right now.

Having said that if you feel you are struggling with unmanageable debt and you really can’t see a way out it’s important that you contact a free advice agency such as the Citizens Advice Bureau who will be able to suggest alternate means by which you can address your debt.

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