Get out of - or avoid - debt

In a age where most people are being offered credit by hundreds of companies, it is hard to resist temptation. Credit cards and loans can have a useful role in our finances if we choose them wisely and repay them promptly. But the best way to manage debt is to take steps to avoid it.

Stay out of the debt trap by thinking carefully about what you want and what you really need before you head out to spend. Reviewing your budget regularly will give you a clear picture of your finances and how much you can really afford to spend. If you cannot truly trust yourself with plastic, then withdraw the amount of cash that you need instead. It is much harder to part with notes than hand over plastic and you will also get a much better sense of how much you are spending. If you opt to use credit, it's essential to shop around for the best deal and rather than filling in applications which arrive through your letterbox. Only then will you know you are making the most of your money.

If it is too late and you already have looming debts then stop spending straight away and take steps to get back in the black.

Step 1: Put together a budget

Keep it simple, with one column to list your incoming funds and the other to detail your outgoing costs. Be honest and make sure that the amounts are realistic. Include everything from your mortgage and bills through to your travel, lunch and toiletry expenses. Try to spot areas where you can cut back and do without non-essential items. It may mean that you have to cut back your social life for a while - be prepared to make sacrifices.

Step 2:prioritise your bills

Make sure that your mortgage or rent and other essential household bills such as electricity, council tax and gas come top of the list. Then put credit card bills, loans and any other debts in order, with the highest interest payments first.

Priority debts are debts owed to creditors who can take the strongest legal actions against you if you do not pay. It is not the size of the debt that makes it a priority, but what the creditors can do to recover their money. If you have mortgage or rent arrears where the lender or landlord can repossess your home or evict you. Unpaid utilities debts mean your electricity, gas or telephone can be disconnected. With unpaid maintenance, child support, council tax or fines a court can use bailiffs to repossess your goods. If, after this, you still have arrears unpaid, you can be sent to prison. If you owe income tax or VAT you can be made bankrupt or imprisoned for non-payment. Hire purchases agreements on essential items, for instance where you buy a vehicle for work, are also priority debts. If you have any of these debts, you must deal with them before you offer to repay any of your non-priority debts.

Examples of non-priority debts are credit card and store card arrears, catalogue arrears, bank overdrafts and loans, benefits overpayments, hire purchase agreements for non-essential items such as a television and money borrowed from family or friends. You cannot be imprisoned for not paying non-priority debts. You are unlikely to lose your home or your essential goods. However, if you make no offers to pay, without explaining why, the creditors will take you to court. If you still fail to pay when the court has ordered it, the creditors can take further action - for example, they can get another court order allowing them to send bailiffs in.

Step 3:Assess your situation

If it is clear from your budget that you will be late making payments, that you do not have enough spare cash to start reducing your debt, or that you cannot even keep up minimum payments, consider asking lenders to reduce payments or freeze interest. Contact the creditors in writing or by telephone, explain the situation and let them know what you can pay - even the smallest payment will show that you are making an effort. If it has not already done so, the bank or card company may freeze your account until you have caught up with payments but they may also freeze the interest you owe or permit reduced payments. Make sure you keep copies of letters and notes of telephone conversations. Some banks and building societies take people more seriously if they come through an advice centre such as Citizens Advice Bureau (CAB) as it shows you are serious about your finances. If you do negotiate lowered repayments, be aware that this could have an effect on your credit record.

Step 4:Consider specialist debt advice

You probably need outside help if you are using one credit card to pay another, if your overdraft is increasing every month and if you are using credit cards to buy essential food or withdraw cash on a regular basis. Another signal that you need help is if you are in difficulty with 'priority' debts such as mortgage arrears or council tax. If you are on a very low income and at least partly dependent on benefits, you may need specialist welfare or debt advice to see if you are claiming all the benefits to which you are entitled. You may find you are entitled to something you are not receiving.

A new industry has grown up over the last three years offering fee-paying debt advice. Several companies advertise these services, often offering to reduce monthly outgoings by rolling two or more debts into one and extending the period for repayment. These debt management services can also negotiate payments to lenders. But many financial experts are sceptical about them because they represent an expensive way of resolving your debt problem and do not provide any services which you cannot secure on your own, free of charge. get in touch with a national organisation such as the Consumer Credit Counselling Service or National Debtline for free information and advice. A free debt management service is also available from Payplan, an independent organisation funded by the credit industry.

Step 5: Set yourself a target for getting the debt paid off.

When you're debt free, make a new budget and stick to it. Cut up any remaining credit cards unless you can pay balances in full each month. Better still, stick to cash or a debit card which takes the money straight out of your current account when you pay. Managing your bank account online will also give you more control and allow you to keep tabs on your spending - and saving.

Latest Threads