Debt Management – Your Options for Getting Out Of Debt - credit card image

Debt Management – Your Options for Getting Out Of Debt

credit cards debt management

The average level of consumer debt (excluding mortgages) in the UK is £4009. With the total amount outstanding on credit cards £207.5bn it is an issue affecting millions of people. Banks and credit card companies make huge profits from encouraging us to spend and consumption is the single biggest factor driving the economy, so the Government are not inclined to assist with our addition to debt. Rather than ignoring the problem this article focuses on Debt Management and explain the options you have for dealing with debt.

Starting Point

Whichever strategy you opt for, an effective starting point for debt management is getting clear about the size of the problem. That means facing up to reality. Putting your head in the sand may seem like a pain free choice, but it is just storing up more pain for another day. So, commit to change and take the first step.

Write down the outstanding balances on all your credit cards and loans. You may wish to use a simple spreadsheet or a pen and paper.

Then write down the interest rate and minimum monthly payment. It might look something like this:-

Lender Balance Interest Rate Minimum Payment
Visa £1000 18.9% £25
Mastercard £1600 21% £30
Storecard £500 36% £15
Car Loan £3600 6% £150
Total £6700   £220

 Debt Management Scenario 1

You have sufficient monthly income to at least meet the minimum repayments each month which in the example above is £220.

An easy way to start is to make sure that you are paying a fixed sum rather than a minimum percentage. For example take the first credit card from the list above. If you pay the minimum of £25 per month it will take 5 years to clear the debt. If you paid the minimum percentage (perhaps 3%) it would extend the life of the loan to 13 years and 2 months!

A free credit card calculator is available on the Which website.

Often when you take out a credit card, the lender will offer to set up a direct debit for either the total balance or the minimum amount. Most people are not confident to clear the full balance every month and so blindly accept the offer of the minimum amount.

The video below explains more:

The first debt management technique we will look at is called The Snowball. The principle is that you target the loan which has the lowest outstanding balance. In the example above this is the storecard. Each month you commit to overpaying that amount by as much as you can. Maybe you can earn a little extra from working overtime, a second job or a side hustle business. Maybe you can also trim your expenses elsewhere.

Imagine that you could find an extra £50 per month and you directed that at the storecard balance. Rather than taking 6 years and 6 months to clear the debt, using the snowball strategy it would take just 9 months.

After 9 months that debt has gone, you may choose to cut up the card and close the account. You now have a ‘spare’ £65 per month which you use to target the next lowest balance which in our example is the Visa Card. As things stand just paying the minimum would take 5 years to clear. By applying the extra £65 you now have from clearing the storecard, that Visa Card can be paid in full in less than 12 months.

Hopefully you get the idea. If you would like a more detailed, step by step walk though, plus templates to download and complete – you may want to take a look at my Debt Disolver Course. It’s a low-cost way of getting on top of your finances.

Debt Management Scenario 2 – you are currently struggling to meet your monthly payments.

Maybe through illness, job loss or other circumstances you are struggling to meet your monthly repayments. Missing payments has a damaging effect on your credit file, can cause you to be chased by creditors and makes borrowing money in the future more difficult.

You may wish to consider a debt management plan (DMP). This helps you to manage your debts and pay them off at a more affordable rate by making reduced monthly payments. In this situation I would advise getting help from a specialist such as the Citizen’s Advice Service or a debt charity such as Step Change.

This choice has potentially serious consequences and shouldn’t be taken lightly. If you face a temporary problem, you can sometimes get help by negotiating directly with your creditors. If you are unable to do so the DMP may be a good option. Here are some of the advantages and disadvantages of a Debt Management Plan.

Advantages Disadvantages
You’ll only pay what you can afford to your creditors after you’ve put together a monthly household budget Some of your creditors may still contact you
If you’ve fallen behind with your household bills you can add the arrears to your DMP to help get your accounts back up to date. You’ll still need to make your regular ongoing monthly payments Many creditors will agree to reduce or stop interest and charges, but they don’t have to
You will make only one monthly payment to your provider and your provider will manage the payments to your creditors for you Your creditors don’t have to agree to your reduced payments and may still take further court action against you, such as a County Court judgment (CCJ)
You can review your DMP regularly to make sure you’re paying what you can afford, or leave it all together if your circumstances improve A debt management plan will almost always affect your credit file and score. This is because you usually pay less than the minimum repayment amount you agreed to when you initially took the debts out. This can remain on your file for 6 years
Outstanding debt can be significantly reduced as amounts are often written off Not all debts can be paid through a DMP. Most debt types can be included, such as credit cards, personal loans, overdrafts, gas and electric arrears, catalogues, cancelled phone contracts and payday loans. However, secured debts, like mortgage arrears or secured loans, and some other debts (including student loans, child support, county court judgments and fines) will still have to be paid separately to a DMP.

Debt Management Scenario 3 – Bankruptcy the nuclear option

If your situation appears hopeless and you cannot see a way of ever getting clear of your debts, then bankruptcy may be worth considering. However, you should seek expert advice before going too far down this route as there are potentially serious consequences. You may face a situation where a creditor has applied to court for you to be declared bankrupt or may have decided to take action yourself.

Bankruptcy may be suitable for you if all of the following apply:

  • you can’t see a way to pay your debts
  • you don’t have many belongings of value and there’s little or no equity in your home
  • it’s unlikely that your situation will improve
  • you live or carry out a business in England or Wales, or have done so at any point in the last 3 years and live permanently in another European state (apart from Denmark)

There isn’t a minimum amount of debt you need to be eligible. If the value of your unsecured debts is higher than the value of the things that you own, then bankruptcy may be worth considering. Unsecured debts include things like credit cards, personal loans and store cards.

Bankruptcy may not be suitable for you if any of the following apply:

  • you owe less than £20,000 and any belongings you own (other than basic household goods and a vehicle worth less than £1,000) are not worth more than £1,000 in total – you might want to consider a debt management plan.
  • you work in certain occupations such as solicitor, accountant or estate agent, as your professional association may bar bankrupt people from membership
  • you don’t want your debt problems to be public
  • your circumstances might change in the near future – for example, if you’re going to inherit money or start a better paying job.
  • you have access to a pension pot that’s bigger than your debt – you might not be allowed to become bankrupt

Action Points

Wherever you stand financially it is a good idea to get your debt management in order. Start with an awareness of where you are by facing up to the current situation. Then take some quick wins by making sure you are not paying a minimum percentage and switch to a minimum amount. If you feel that you can take charge of your debts, then consider the Snowball strategy outlined above. If you feel that you need extra help, then take advice from some of the sources mentioned earlier. Remember you are not alone and taking action will make you feel a lot better about yourself and your financial life.

If you found this post useful you may enjoy the Fearless Finance Podcast.

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