Next, Prioritise Your Debts

Category: Finance, Credit.

Most of the nation is in debt to some degree.

But there is a way out, if you have the strength to help yourself. There s nothing shameful in it, but it can be emotionally crippling to be several thousand pounds in debt and feeling like there s no way out. The biggest mistake to make when you re in debt is to ignore it. Admitting you re in debt and facing up to how much you owe is the first step towards solving the problem. Burying your head in the sand only causes the debts to pile up and get worse, and can even result in mild panic attacks whenever the phone rings or the letterbox clatters. Once you feel you can face it, get a copy of your credit report and systematically go through every entry, contacting creditors if needed, to ascertain exactly how much debt you carry. The aim of this step is to get a full, frank and accurate picture of your financial situation.

If you re making monthly payments already, calculate all these and work out how much of the debt you have left. Next, prioritise your debts. Those with lower interest can be paid at the minimum amount. Those debts which carry higher interest rates are best paid off in instalments of more than the minimum amount, to clear the debt faster. Contact your creditors, explain the situation and what you re trying to do, and ask if they can arrange a payment holiday for you, to give you time to concentrate on the higher- interest debts. If you haven t already, set a household budget. If you ve kept up payments, some companies will allow this.

It may mean carrying on as normal for a month to assess your spending patterns and outgoings. Once you have a good idea of where your money goes, you can begin to budget. Keep all receipts, and you may even find it helpful to carry a diary to keep track of everything you spend, and on what. Start off with the most important fixed costs such as rent or mortgage, and council tax. Finally, look at what you spend on non- essentials like toiletries, clothes and meals out. Then work out how much you spend per month on food, and any other, fuel and electricity monthly living expenses. You need to look for things you can either cut down on or cut out altogether, until your debts are cleared.

Note that up to now, we haven t included the repayments you re already making. You should then be left with your disposable income . This is because, you will need, at this stage to contact all your creditors to see if they can offer you a new repayment plan. Some may not accept at first, but if they can see you are genuinely trying to clear off the debt, they should accommodate. Assign a percentage of your disposable income to each creditor based on their priority, and give them a call proposing a new repayment. If you find that you have too many debts to keep track of, or the creditors won t re- negotiate with you, it may be worth taking out a debt consolidation loan to cover the existing debts and condense your monthly payments into one. Don t be tempted to add on an extra couple of hundred as you ll only have to pay even more interest.

Follow the steps above, call your creditors for a settlement fee- sometimes lower than the normal amount- and apply to borrow only enough to cover all your debts. Once you receive the loan, make sure you pay off each creditor and get confirmation in writing that each debt is cleared. Getting out of debt is a long slow process, but it s worth it in the end. Then avoid getting into any more debt, and keep up the repayments on your single loan. It s worth getting a copy of your credit report regularly to see how things are going. Settled debts are usually cleared off your record after 7 years from date of final payment, so don t be dismayed if your score is still low within this time.