TIPS FOR BEATING DEBT

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TIPS FOR BEATING DEBT

Post  sleepyme123 on Thu Nov 15, 2012 9:47 am

How you tackle your debt obviously depends on the size of the debt and its proportion to your monthly income. For some, simply making a few sacrifices, such as cutting back on the morning coffee run and using the money to pay off a credit card, will suffice, but in more serious cases an Individual Voluntary Agreement (IVA) could be the answer.

We offer our top tips for getting out of debt.

Work it out

Sitting down and working out how much you owe can be the hardest part of beating debt. For many it is easier to leave bills unopened and burying your head in the sand, but ignoring the problem is the quickest route to County Court Judgements and creditors making claims on your property. The Consumer Credit Counselling Service warns that if debt repayments take more than a fifth of your monthly budget then you are in the credit danger zone.

Budget

Actually writing on paper what you earn against what you spend is the easiest way of sorting out what you can and can't afford, and the only way of coming up with a reasonable estimate for your weekly or monthly spending.

Add up all your income – salary, benefits and whatever else might reach your account each month – and subtract from it your rent or mortgage payments, bills and other necessities, and you'll be left with the amount you have for spending or saving each month. Use this process to also check whether you are on the correct tax code and are owed any Government benefits or tax credits that you are not currently claiming.

It is important to be honest with how much you spend each month, but also realistic. Don't pretend that you will quit smoking if in reality it is unlikely. Use a household budget calculator to help you form a realistic picture of your disposable income.

See where you can trim your budget, such as cutting down on the nights you go out, and be strict.

Don't keep it to yourself

Over a third of people with debt problems hide it from their partners. One of the main steps to sorting out your debt problems is admitting they exist to anyone that may be affected and following this up with action.

Tackle priority debts

List your debts, then decide which are the most urgent. Those that carry the harshest penalties for default must be dealt with first. Mortgage arrears, for example, will eventually result in losing a home. Council tax arrears carry the risk of a prison sentence.

Speak to creditors

Although it can appear daunting, speaking to a creditor about repayment difficulties is by far the better option than avoiding the issue. Lenders are experienced in helping customers that have run into financial difficulties and will attempt to help if you are struggling with repayments.

The same applies to utility companies. There are several grants and subsidies available to customers that struggle to pay energy and water bills so speak to your supplier to see if they can help. A list of what help energy companies are offering customers can be found here.

Avoid just paying the minimum repayments on credit cards

Although it is better to repay the minimum than nothing at all, in reality you are treading water and playing into the card issuer's hands. Card companies have been forced to put warnings against paying just the minimum balance on their statements and with good reason. It would take 15 years to pay off the £3,000 balance on a 14.9% APR card if only the minimum payment of £90 was made. You would nearly halve that time if you paid an additional £60 a month.

Get a cheaper credit card

Despite fees, there are still competitive 12-month interest free balance transfer deals around that are preferable to paying the lender's standard card rate. Visit comparethemarket or gocompare to find the latest deals.

For those that don't want the hassle of switching, a life of balance card could be the answer. These cards charge interest on balances transferred from day one, but typically at a much lower rate than card purchases and usually at a better rate of interest than the customer could secure by using a personal loan.

Switch loans and mortgages

Your mortgage is probably your biggest expense and if you are paying the lender's standard variable rate then you are throwing money away. Best buy fixed rates currently start from 4.50%, while variable deals start from 4.85% - well below the average SVR of 6.5%. For example, someone with a £100,000 repayment mortgage could save £450 a year by switching their mortgage to Nationwide's 4.59% two-year fixed.

The same applies with personal loans. New rules mean it is easier to switch personal loans and competition in the market is rife. Take a look at our loans service to find the best rate.

Switch utility suppliers

You can save hundreds of pounds a year by moving your gas, electricity, home phone, mobile and internet provider. The process to switch these services should be simple and competition in the sectors means that there are good deals to be found. Visit This is Money's bills section to see how much you could save by switching suppliers.

Cut up store cards

Quite simply, these cards rely on consumer apathy and ignorance and should be binned immediately. They typically entice customers with the offer of a 10% discount on goods, but this is easily clawed back by the excessive interest charged, usually around 30%.

Don't borrow more to pay off debts

Although it is advisable to switch credit cards and loans to find cheaper deals, borrowing more money to pay off debts could only lead to more trouble.

Contact the right people

Daytime TV is full of adverts from debt management companies telling you that they can help transform your debt into manageable chunks. What they don't tell you about is the high level of fees and interest they charge for the privilege.

Reputable organisations, such as PayPlan or the Citizens Advice Bureau, or a debt charity such as National Debtline will not only help you for free, but can also help reduce your level of debt. They negotiate with lenders on your behalf to work out a manageable budget based on how much you can realistically afford to repay. Many lenders are open to negotiation as they would prefer to get some of the money they are owed back than for the debtor to declare themselves bankrupt and lose the lot.

IVAs and bankruptcy

An IVA is a legal contract between an individual and their creditors to repay the debts. Although IVAs don't cover mortgages (apart from arrears), your house cannot be repossessed while you are on an IVA. These are suitable only for people who are employed full-time and can be used if you owe more than £10,000 to three or more creditors.

Three quarters of your creditors have to agree to the IVA, which typically repays 35p to 40p in the pound off your unsecured debts while the interest is frozen. Secured debts, such as a mortgage, have to be repaid in full.

In more serious cases bankruptcy is the only option. It costs just £450 to declare yourself bankrupt, which includes the bankruptcy order and court fees. A trustee, usually an accountant, is put in charge of your estate. Anything you own, including anything you inherit, plus a proportion of your income will be taken and passed on to creditors. However, bankruptcy should be regarded as a last resort. By declaring bankruptcy you lose control over the majority of your assets and also limit any future access to the credit market.

Be disciplined

Devise a realistic budget and stick to it. Work out your weekly spending habits and cut out anything that is an unnecessary. If you do switch cards, don't start spending on the old one, cut up expensive store cards and constantly keep an eye on good deals in the market where you can save money.
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sleepyme123
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