Dealing with Debt

Introduction

This website will give you all the information that you need to make sensible decisions when considering which credit cards to use and how to use them to your best advantage. But what happens when things go wrong? Whilst using credit cards and loans has become a modern 'necessity' we should all use these facilities with care and a degree of caution. Many of us don't give due consideration to the problems that life sometimes throws at us, such as illness or redundancy and this can often cause real problems, with very serious consequences.

Are you concerned about your debts?

If you are worried that your debts are out of control or that they may be heading that way, then our debt guide will help you assess the situation and provide guidance on how to deal with it. You may be able to improve your situation by managing your monthly spending more carefully. Or you may have a more serious debt problem which means that you have to negotiate with your creditors or even go as far as making yourself bankrupt. The important thing is that you start dealing with the situation. The fact that you are reading this now is a good start, so please read on.

How do you start to manage your debts?

If you are worried about your debts, it can be quite scary. But if you take a calm, methodical approach to addressing them, it will pay great dividends and you will be surprised at how quickly you begin to feel in control. Use these steps as a guide.

  • Step 1 - Face up to the problem (your 'lightbulb moment')
  • Step 2 - Assess the nature and scale of the problem
  • Step 3 - Plan how you will deal with your debts
  • Step 4 - Put the plan into operation
  • Step 5 - Monitor your progress and refine your plan

Don't forget that you are not alone. There are many people in the same situation. Why not share your experiences and get mutual support by discussing them on our debt forum? There are also places where you can get direct assistance from independent trained advisors such as the Citizens' Advice Bureau(CAB), Citizens' Advice Scotland (CAS), Citizens' Advice Northern Ireland, the Consumer Credit Counselling Service(CCCS) and the National Debtline.

Step 1 - Face up to the problem (the 'lightbulb moment')

By far the worst thing that anyone can do when they find themselves in financial difficulty, is to bury their heads in the sand in the hope that the problem will go away. Problems do not go away by ignoring them, they only escalate. The best thing that you can do when there is a problem with making a payment on a loan or credit card, is to take positive action. Many people refer to having their 'lightbulb moment'. This is when it dawns on them that there is a problem. It usually comes with a sudden dose of common sense that makes them realise that they can only deal with it by taking control and changing their existing spending patterns. This is discussed further in Step 3.

Step 2 - Assess the nature and scale of the problem (Statement of Affairs)

This step helps you to work out what debt you have, how much it is costing you and whether you can afford to meet the repayments. When you have done that, then that lightbulb starts shining a little brighter and some of the dark clouds around you will start to lift. The "total debt" figure might scare you a little, but you will have begun to take control of your debts rather than having them control you. So what do you need to do?

You need to create a Statement of Affairs (SOA): a simple document that lists all your monthly income, your monthly expenditure, your debts and your debt repayments. It gives you a clear picture of your financial position and is in a format that you can share with others (if you wish): a debt advisor, a lender or anyone else who may be helping you with your finances. If you are having difficulty in meeting your debt repayments, you may need to negotiate with your creditors, in which case they will actually ask you to send them an SOA. To help you produce a Statement of Affairs, we have developed an SOA Calculator that prompts you to enter all the relevant information and does all the maths for you. If you wish to get feedback from others, then you can format the calculator output for posting on our forums or the debt forums on other personal finance websites such as MoneySavingExpert (MSE) or The Motley Fool (TMF).

If your SOA shows that you cannot meet your debt commitments, then you have a problem and you need to take action - the sooner the better. If your SOA shows that you can meet your debt commitments, but only by making minimum monthly payments on your credit cards, then you should still take action because you will be paying an enormous amount of interest and it will take years to pay them off. For example, if you only make the required 2% minimum monthly payment on a £5000 credit card debt at 15.9% APR, then it would take you 39 years to pay off the debt and it would cost you nearly £8000 in interest. However, if you paid £150 every month then it would take you less than 4 years to pay off the same debt and you would pay less than £1500 in interest. You can work out how long it will take you to pay off your credit cards by entering your figures into our credit card repayment calculator.

Step 3 - Plan how you will deal with your debts

Having completed Step 2, you should now have a clear idea of your financial position including:

  • whether your income is sufficient to meet your monthly expenditure;
  • whether you can make the necessary minimum debt repayments;
  • whether you have money left over to pay off your debts more quickly;
  • how long it will take you to pay off any credit card debt that you have.

Armed with this knowledge, you can now decide how you are going to tackle those debts. It is not within the scope of this document to cater for every debt situation, so we would strongly recommend that you seek advice on your own particular circumstances. You can do this by contacting one of the organisations listed above. You can also post your SOA on our debt management forum (or that of TMF or MSE) where you will get valuable feedback.

Although each person's situation is different, there are some general points that we can make. First, you have probably seen countless TV and newspaper advertisements for consolidation loans which promise to replace all your monthly payments with "one easy to manage payment", often with suggestions that you borrow a bit more to pay for a family holiday or buy a new car. While consolidation loans can sometimes play a part in a debt recovery plan, they are not an easy answer and for most people they are a bad thing. To learn why this is the case, read our Consolidation Loans Commentary.

If your Statement of Affairs reveals that you do not have sufficient income to meet your debt repayments or you barely have sufficient to do so, then you should now read our Guide to Problem Debts, written by a highly respected debt expert, Colin Wynne. If you are in the more fortunate position where you can meet your debt repayments but want to get them paid off more quickly, read our Guide to Becoming Debt Free.

Step 4 - Put the plan into operation

You can have the best plan in the world but, to make it worthwhile, you must put it into operation. So why not get started today! The sooner you start, the sooner you will be debt free. We don't pretend that it is easy or that there won't be challenges on the way, but when you set off on your debt-free journey, one day you will arrive at your destination. Why not share your progress with others on a debt discussion forum?

Step 5 - Monitor your progress and refine your plan

As with any plan, it makes sense to monitor your progress. Ticking off milestones along the way, like paying off your first credit card, can be a great boost and spur you on to the next one. If you have an unexpected expense one month, don't let that make you give up. You might be able to cut back a little the following month or just adjust your plan to make it more realistic.

Summary

If you feel your debts are out of control it can all seem too overwhelming and too big to take on. However, by following a logical approach, taking advice from others and documenting your Statement of Affairs, you will quickly feel back in control. It may not be easy, but you will get there.

Acknowledgements

Makesenseofcards.com would like to thank Colin Wynne for his contribution to this Debt Guide, particularly for writing the section on Problem Debt. He has also contributed his knowledge, experience and some paragraphs to other areas of the guide. Colin is a debt expert who understands both sides of the fence when it comes to debt. In his day job he is the Managing Director of a Debt Recovery Firm (from businesses, not individuals), and he gives a great amount of his spare time as an informal debt advisor on the Dealing with Debt discussion board on the Motley Fool website.