Updated: Aug 6
Many households are facing serious challenges with debt problems. According to The Money Charity, the average UK household has up to £60,000 of debts including a mortgage and a total of £4,000 in unsecured debt. One person every 4 minutes is declared insolvent or bankrupt. By only paying the minimum payments on the average credit card debt every month, it will take the consumer 26 years to clear this debt.
Debt is usually an indication that one is living above their net income. This could be due to a loss of income or living on a low income for a long period of time with high levels of expenses.
Currently, due to the COVID-19 pandemic outbreak, which has caused more job losses and income reduction, people are inevitably finding themselves struggling with serious debt issues.
Debt management services are available to anyone facing serious debt challenges and help prevent insolvency or bankruptcy.
Having debt is nothing to be worried about as there is always a solution to every debt problem. The earlier you start to manage your debts, the easier it becomes to deal with the debt problem. Ignoring your debts, can lead to stress, depression, fear and overwhelm, all which are preventable when you face your debt problem head-on.
If you are owing your creditors, several options are available to help you in paying off your debts. These include setting a Debt Management Plan, Debt Consolidation, or an Individual Voluntary Arrangement (IVA).
1. Debt Management Plan
A debt management plan is managed by a debt management company with a structured repayment plan in agreement with your creditors. This usually consists of getting some advice by seeing a debt counsellor from credit counselling organisations. They will work on a budget with you, where you can still afford to pay all your bills. Some companies may charge you a fee for this service. This is also something you can do yourself by reviewing your budget, seeing what you can and cannot afford to pay and contacting your creditor to agree on the payment plan each month. It is important that you understand the interest rates, your total balance, and any impact your debt management plan will have on your credit report.
2. Debt Consolidation
Debt consolidation is where you bring all your debts usually unsecured debts under one payment by taking out a secure or unsecured loan. Rather than making individual payments to all your creditors, you can use the loan to pay off each debt and then focus only on paying the loan. Debt consolidation can be beneficial if the loan you are taking has no or very low-interest rate compared to what you are already paying.
The con to debt consolidation is that it can seem like you are passing the debt on from one place to another so it’s important to have a plan in place to pay off the debt and not take on more debt in the future. Homeowners who consolidate their debts by re-mortgaging must remember that they could run the risk of losing their home if payments are not made on time; interest rates can go up causing their repayments to increase, and the number years they have left on the mortgage is likely to be extended when consolidating debt against their home.
3. An Individual Voluntary Arrangement (IVA)
An IVA is managed by an insolvency practitioner, which allows you to pay your creditors a low affordable payment monthly. An IVA allows you to write off your debt at the end of your payment plan, which can be a maximum of five years, it also keeps creditors from contacting you. The biggest con to having an IVA is that it will negatively impact your credit score and report for up to six years. For people who are at risk of bankruptcy, this can be a viable option for them before they consider bankruptcy.
Tips on how to manage your debt
Having some level of debt is inevitable, but you must ensure you do not allow your debts to get out of control. Whether you have little or large amounts of debts, it is crucial you put more effort into paying them off to become financially independent. Follow the tips below on how to manage your debts.
Seek free debt advice
Having debt can become overwhelming. It’s important that you seek free debt advise initially to better understand what options are available to you, what your consumer rights, and how to deal with debt collectors. Seek help from the Citizens Advice Bureau as a starting point.
Do not add to your existing debt
Now that you have decided to tackle your debt it is important not to add more debt to your existing debt. If you are having problems with using credit cards, overdrafts, and store cards, stop using them while you pay off your debts completely. After paying off all your debts, be sure to only use a maximum of 30% of your credit limit and always paying it off in full each month.
Create a budget
Having a budget in place is an important technique for managing your debts. This requires you to have a checklist of your monthly income and expenses, and then you can cut any unnecessary spending. The benefit of having a budget is that you can ensure your priority bills are paid, identify where your money is going and throw extra money towards paying off your debts quicker.
Pay your bills on time each month
By paying your bills on time each month, you are minimising the chances of getting into further debt and damaging your credit score. Paying your bills late attracts additional fees, adding further to your existing debt making it difficult to pay off your debt any time soon.
Know your creditors and the amount owed
Keep a debt repayment tracker showing, who your creditors are, the amount you owe, the interest rate you are paying, and the expected repayment date. By doing this, you will be able to plan this into your budget and build a strategy to make payments on time and pay off your debts earlier.
Pay the minimum credit card repayments and then some
Credit cards have higher interest rates than other debts. So, make sure to pay the minimum repayments on your credit cards if you cannot afford to pay anything else. If you want to become debt-free, you will have to do more than paying the minimum payments each month. Using the debt snowball or Avalanche method will help you pay more towards your debt and finally, see those numbers reduce
Have an emergency fund
While it is good to pay off debts, you should also prioritise increasing your savings so that you will not have to fall back on your credit cards if you have any financial emergency. Having an emergency fund will provide a safety cushion for you to fall back on when unwanted events take place.
Request for interest rates to be lowered
Your creditors want you to be able to pay your debts off. Requesting to lower or remove the interest rate on your account can be of great help to you and reduce the total amount of debt you will pay. This will give you extra money in your pocket to put towards tackling other debts and towards your other goals.
Creating a debt repayment plan is a good place to start when you want to become debt-free. Whether you choose Debt management plan, IVA or debt consolidation- The most important thing is that your debt repayment is affordable, you contact your creditors, seek help and it should have as little impact on your credit as possible.
So, try out any of the above tips to save yourself from financial stress and bankruptcy, and never allow your debts to pile up to the extent of outweighing your income. Now that you know how to manage your debts, be guaranteed that you will gain financial freedom if you follow the tips in this post.