It's time to get some debt perspective

Those in debt tend to grasp at one of these five lifelines. But they need some perspective...

When we counsel someone on their debt problems we investigate the ‘evidence’ objectively to find the best solution for their individual situation. However it’s important that debtors also try to apply some perspective, otherwise they’ll be damaging their financial future even more.

None of us are objective, rational beings. We smoke and drink even though we know it’s harmful. We lie, even though we know it could come back to haunt us. And we spend money we don’t have even though it might cause financial anguish later. We focus on the short-term rather than the long-term. It’s not a failure, it’s a human condition.

It’s understandable that if you have a debt problem you want the solution to be as painless as possible and we want to avoid long-term pain. For example, six months’ worth of repayments is acceptable but six years can seem an eternity.

But you have to apply some perspective, otherwise you’ll never understand the gravity of the situation. There are five things we hear again and again when counselling clients; five statements that need perspective.

1. I can deal with it

If you think you’re in charge of your debts then it’s difficult to realise that the control of your finances has now ceded to the banks and finance companies. You think you’re paying the minimums and keeping up with the repayments. The odd missed payment won’t affect you in the grand scheme of things.

Perspective: You’re living on credit you’re never going to pay off. Buying just one high-priced item on credit and then paying off the minimum each month will put back the repayment date by many years. You forget about, or don’t understand, the interest rate and fees, and these can come back to haunt you pretty quickly.

2. I need a debt solution but I have to maintain my lifestyle

OK, you’ve realised you need to pay back your debts but what about the holiday with the family, the presents the kids always expect for Christmas and birthdays, and the nice meals you have with neighbours each month?

Perspective: Those days are over. Your budget can’t handle paying your essentials, your debts AND those extra treats, so something’s got to give. It can feel heart-wrenching to tell family and friends that you can’t live up to this ideal anymore, but you simply can’t afford it.

3. Paying off the credit card is more important than paying the gas bill

OK, you’ll cut back on spending. What needs to go first? Well that little piece of plastic is a lifeline; when the current account runs short you need your flexible friend to help you get through to payday. And if you don’t pay, the credit card companies are quick to get in touch, and are quite insistent you pay them their dues so you don’t want to annoy them.

Given you still want those extra-special lifestyle items, the only thing left is to cut out paying the water, electricity or gas, or missing a month on the Council Tax. You’ll pay them next month, promise.

Perspective: If you don’t pay your Council Tax you could go to jail. It’s that serious. Essential expenses and priority arrears first, credit cards second and luxuries later.

4. An IVA is the answer to my prayers

Throughout the last decade the huge rise in personal IVAs has permanently altered the debt landscape. The IVA (coincidentally 25 years old this week) is, in the right situation, the correct solution.

So why should you pay off all the money you owe when you can cut 70% of the debt in an instant?

Perspective: IVAs are only an answer to your prayers if your financial situation dictates that you need an IVA.

Yes, you do write off a certain amount of debt with an IVA but you could be forced to remortgage your house, you can lose your car, the fees can be high, and the process can be incredibly intrusive. A debt management plan never goes into that level of detail.

Too often, the insidious creep of “IVA=write off debt” (parroted by dodgy debt companies) means that it’s seen as an easy way out. It isn’t.

5. No matter what, the answer can’t affect my credit rating

So, you’ve plucked up the courage to enter a debt solution. It’s going to be painful paying off your debts, but you’ll stick to it. Just one thing; the solution can’t hit your credit rating.

Perspective: Frequently, the primary reason for not wanting to accept a debt solution is because of the adverse affect that it has on your credit rating. But let’s focus on the important issue: the overriding priority should always be to reduce your debts. How will more credit and its interest rate – the reason behind the debt in the first place – help you this time when it failed so badly before?

Of course a bit of perspective is incredibly difficult to have when you’re too close to the issue. A lot of clients don’t understand the severity of their problem. In some cases they don’t even earn enough to pay for their essentials, never mind the credit card bill (a “deficit budget”).

We can provide perspective, and calmly and empathically help you to focus on the most important thing; finding a debt solution that’s the best fit for you.