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While credit can be useful, having debt can be stressful. Struggling to keep up with repayments can feel very much like walking the wrong way up an escalator. No matter how hard you try, it can lead to a feeling of getting nowhere fast.
But getting out of debt doesn’t have to be too hard. And taking control is the first step. We’ve outlined five simple ways to deal with your debts, before it becomes a bigger problem.
Knowledge is power. So getting into a more viable financial position means being really honest with yourself about your level of debt. It’s vital to sit down and work out how much you owe, and to whom. Remember that there are two different kinds of debt;
These are debts that if left unpaid would risk you losing your house or criminalised. These would include mortgage or rent payments, TV Licence payments, secured loans, court fines, and council tax.
These include utility bill payments, credit card debts, overdrafts, benefit overpayments.
It’s recommended that you always pay your priority debts first.
Once you have sorted out how much you owe, and to whom, you need to examine your income and outgoings. By analysing how much spare cash you have available after you have bought basics such as food, you can prioritise money left over for paying off your debts. If there is none left, concentrate on paying your priority debts first.
If possible, find ways to increase your earnings. If you have a spare room, consider taking on a lodger, (you’re allowed a tax free income of £4, 250 per year from a lodger). Or consider extra part time work you could take on at weekends.
Remember that interest rates on non-priority debts will continue to rack up. So if you have credit card debt consider applying for a 0% balance transfer card. If this isn’t possible due to bad credit, perhaps contact credit card companies and explain that you’re currently struggling. Make sure to include your budget sheet showing how much you are earning and what your essential outgoings are. You can then ask them if they would consider freezing the interest and accepting whatever you can afford in repayments. Before you do this though, remember that this will be a big hit to your credit rating, and you’ll have to cut up your credit card.
Beware consolidating your existing debts. Although debt consolidation companies make things easier in terms of combining all your debts into one monthly re-payment, some companies will secure the debt against your home. APR rates can also be higher than your existing debts, so always check that you would actually be repaying less.
Debt consolidation and debt management are two different things, so don’t get them confused! Both are intended to help manage your monthly payments, but it’s all about deciding which option will be right for you.
Debt Consolidation merges all of your debts together into one single debt that covers them all. This can make repaying your debts much easier, as you only have to make one single payment every month.
This consolidated loan could repay outstanding debts on credit cards, personal loans or store cards.
If you do choose to opt for a debt consolidation, make sure you check if the loan’s unsecured or not. An unsecured loan means that you’re lent the money based on whether they believe you’re likely to repay. This is based on your credit history. A secured loan is secured against a valuable asset such as your house. This means your home could be repossessed if you fall behind on your payments.
It’s important to note that if you do choose to consolidate your debts you should not take out any other loans or credit and you should destroy your credit cards until you have got your finances back on track.
All of your outstanding credit is in one place
It makes repayment simpler as you only have one interest rate and one single repayment.
It could improve your credit score
Once your debt is consolidated and you are able to manage your monthly payments, you may see your credit score improve. This is because lenders and banks can see that you’re able to keep up with payments and are therefore more trustworthy to borrow money.
You could end up paying back more
Consolidating your debts and repaying over a longer period of time could see you paying back than if you pay them back separately.
Higher interest rates
If you move your credit card repayments to a consolidation loan, you may end up with higher interest rates. A way to avoid these is to do a balance transfer on a 0% introductory rate.
Early repayment fees
Some lenders charge a fee to fully repay a loan before the end of its term. Check the terms and conditions to make sure you know whether these fees apply.
If you really don’t know where to start, and feel overwhelmed by debt, there are some helpful organisations available. Try the Step Change free debt remedy service, or get free impartial advice from the Citizens Advice Bureau.