With bad debts, insolvencies and house repossessions all rocketing, now would be a good time to tackle your debts. Here's how to get started.
There's been a lot of doom and gloom about the UK's growing debt problem in the financial pages in the last week or so. First, the UK's five biggest banks announced their half-yearly results. Although their combined profits climbed 21% to reach £19.3 billion, bad debts soared by 29% to reach £5.8 billion. That's a lot of poor lending decisions!
Second, figures from the Department of Trade & Industry showed that over 26,000 people became insolvent or bankrupt in the second quarter of this year, up two-thirds (66%) on the same period in 2005 (learn more in Britain's Going Bust!). Third, mortgage repossessions hit 8,140 in the first half of 2006, which is the highest figure for five years, although moderate by historical standards.
For the record, this government has presided over the biggest increase in personal debt in UK history, with the total rising from under £500 billion in April 1997 to £1,228 billion in June 2006. In other words, in a little over nine years, personal debt has increased by £728 billion, or almost 150%. Ouch!
As a keen anti-debt campaigner, these and other trends leave me worried about our ability to manage our finances properly. Indeed, as someone who struggled to repay £50,000 of non-mortgage debt in the Nineties, I know how difficult it is to seize the nettle and face up to a serious debt problem.
Nevertheless, I was never as relieved as when I turned my back on credit and began to reduce my personal debt burden. Only when I stopped panicking, faced up to my problem and produced a plan was I able to see the light at the end of the tunnel. By following these ten steps provided by The Motley Fool and the Citizens Advice Bureau, you too can get to grips with your debts and start the journey towards becoming a saver and investor:
1. Don't ignore the problem
Millions of people do borrow sensibly, for example, to fund a major purchase such as a car or home improvements. However, if your debt burden keeps rising year after year, or you find yourself using credit cards just to make ends meet, then you clearly have a problem.
Instead of burying your head in the sand and hoping the problem will go away, be brave! Contact your creditors (the firms to which you owe money) and explain that you are having trouble budgeting and meeting your debt repayments. This is the first, and often the hardest, step on your journey towards financial enlightenment. Trust me, once you've made those calls, you'll sleep easier!
2. Work out how much you can afford to pay
The next step is to establish how much money you have coming in, how much is going out, and what's left to offer to lenders. This means drawing up a monthly budget, listing every penny which you receive (wages, benefits, savings interest, dividends from shares, etc.), together with your basic living expenses and any payments needed to keep the wolf from the door. Subtracting your expenditure from your income will give you a figure for your disposable income, including what's realistically available to your creditors.
Get to grips with your household budget with this statement of affairs calculator.
3. Pay your most important bills first
Some bills are more important than others, so ignore the loud shouts for payment and concentrate on paying "THEM FIRST":
Tax (Council) -- because you can be imprisoned for not paying it
Hire purchase -- non-payment could lead to your car or other goods being seized
Electricity and gas -- to avoid being cut off
Maintenance and child support
Fines -- to avoid going to prison
Income Tax
Rent or mortgage --to avoid losing your home
Second mortgage
Television Licence
If you're not good at paying bills on time, pay these crucial bills by standing order or direct debit. Otherwise, you may find yourself in real difficulty.
Slash your energy bills and find a cheaper mortgage today!
4. Maximise your income
By increasing your income, you can speed up the rate at which you repay your debts, reduce your overall interest bill, and bring forward your debt-freedom day. Hence, read these Ten Ways To Boost Your Salary and find out what benefits and tax credits you can claim at the independent EntitledTo website.
5. Be wary of borrowing more money to pay off existing debts
Newspapers and TV channels are packed with adverts from loan companies that promise to "clear" your existing debts and replace them with one easy monthly repayment. As I warned in this article, you'd be wise to steer clear of these lenders, many of which are vultures preying on vulnerable borrowers.
However, by carefully using 0% credit cards, you can reduce your interest bill to zero for up to a year. This is a sensible step -- if you make a real effort to pay off what you owe during the 0% period, and never, ever spend on this plastic. Learn more in Interest-Free Credit Made Easy and check out these 0% credit cards.
6. Do your research before borrowing
Never borrow money on the spur of the moment, unless you want to be taken for a ride while paying a fortune for the privilege. To become a better borrower, check out the following articles: How To Master Your Credit Cards and Great Deals For Borrowers!
Check out these low-rate personal loans!
7. Be tough with your credit cards
In The UK's Most Dangerous Credit Cards, I warned cardholders not to pay only the minimum monthly repayment (MMR) on their credit cards. Thanks to MMRs, the road to Hell is paved with plastic, because a modest debt can take up to forty years to repay!
Instead of paying MMRs, set up a standing order or direct debit for a sensible proportion of your credit card debt, say, 10% or 5%. By paying a flat sum each month (plus any additional payments that you can afford) instead of the bare minimum, you'll pay off your plastic debts far faster.
8. Try to save every month
Learn to budget -- and aim to stay within your budget, which will give you something left over to save each month. This will also enable you to plan ahead for future spending, such as Christmas, holidays and so on.
9. Monitor your income and expenses
Keep a close eye on your income and expenses, so that you can react to any changes which affect your finances. If your income falls (for example, if you can't earn overtime at work), you should contact your creditors to keep them informed of your situation. Likewise, if your bills are going up (for instance, gas and electricity prices are going through the roof), then you need to be ready to make cutbacks elsewhere.
10. Get free, impartial advice
If you do get into difficulty, make sure that you don't end up in the hands of firms which stand to profit from giving you debt-management advice. Visit your local Citizens Advice Bureau, or contact one of the free, independent debt-counselling charities, such as the Consumer Credit Counselling Service, National Debtline and Payplan. Also, check out the Fool's Get Out of Debt centre and Dealing with Debt discussion board.
Finally, remember that you owe your creditors money, not your life. Don't make yourself ill worrying about your finances -- instead, start turning the tanker around today!
More: Need cheaper credit? Try these 0% credit cards, low-rate personal loans and bargain mortgages!