When Finances Go Wrong - Debt

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1 When Finances Go Wrong - Debt Very few people now have no debt at all after all a mobile phone contract, or your rent/mortgage are both debts. It becomes an issue for people when they cannot meet the payments for their debts. We meet a lot of students who have problems with their finances and feel their situation is out of control, unfortunately when the finances get out of control and it turns into a debt situation, it isn't just a financial problem it can take over your life. The sooner problems debts are dealt with the less likely they are going to turn into a crisis situation. The nature of financial products means that interest compounds over time and so financially the situation will only get worse. The aim of these pages is to give you some simple advice to get you started in resolving your situation, essentially, sorting out problem debts can be summarised within the following three rules: Borrowing More Is Not A Solution What To Do In Three Easy Lines The Checklist Borrowing More Is Not A Solution Traditional debt advice says never borrow your way out of a debt problem. But financial products and their suppliers are competing with each other constantly and so this traditional advice ignores debt costs which may be reduced; a more modern approach is never borrow more to get out of a debt problem. If it is possible to borrow elsewhere more cheaply to replace existing borrowing, then this can provide a saving. It is possible to save money by reducing the amount paid in interest by being savvier with borrowing. This is a great start to debt rescue, and must be one part of a disciplined attempt to regain control of the situation looking at your entire finances and spending habits is the other. A warning signal is having debt that isn't really from anything - it didn't buy a car or a computer, it simply came from continually spending more than your income. This is a danger signal and needs attention. Having said that, even if you do know what the debts are from, if they weren't planned for, budgeted, then you could still have problems There's Always A Route Out Being in debt can be a particularly stressful time. Many people are scared to tell family, partners, friends or anyone. There is always a way the problem can be resolved. It may not be easy or quick, but there is a path. If you're hiding your debts from your family or partner, one option is to read through the solutions first, work out the basics of what you're going to do, and go to them with an action plan. It s much easier that way and remember; if you're prepared to take action the question isn't will I

2 ever get through this?, but when will I get through this? Good luck. For students, if parents are willing to help with clearing the debts it will assist if the money is part of a structured approach to financial management. It is also important to tell your academic supervisor if you are worried about your debts so if your academic work is affected there is a record. Some Initial Action You Can Take: Try not to default or miss payments, but ensure that any priority payments such as rent and utilities are paid first. Let your lender know if you are going to be unable to pay. If you can t make the repayments, prepare your budget and tell your lender how much you can pay and when. Don t agree to pay more than you can afford. Even if you can only afford 1 per week pay it and maintain the payments for as long as you need to. Ask your lender to stop adding interest and to refund any charges. Of course it's more easily said than done, if you are struggling contact one of the agencies at the end of this article, they will be able to give you more advice and support. The rest of this article contains some other action you can take to reassess your finances, What To Do In Three Easy Lines Lower the interest Pay the most expensive first Free help helps As you work your way through the checklist, the options that are right for you depend on your debt situation. Some of the initial points will only work for those with a good credit history, not too severe debts, and other income alongside student funding. But, it's worth checking and trying each one in order. Once you've found something that works keep going down the list to see if there's anything else that can help. Checklist Credit Cards Used correctly and with discipline credit cards are possibly the cheapest way of borrowing. Money can be saved either by shifting a debt to new balance transfer offers, or shuffling a debt from a more expensive card to a less expensive one. Shifting balances and prioritizing repaying expensive debts first can create savings in your budget.

3 Using credit cards effectively means: paying off more than the minimum repayment; paying off as much of the debt as quickly as possible and not borrowing any more than is needed. Unsecured Loans. (This is money that you ve borrowed which is not secured on anything like a car or house) Standard personal loans can give you a consistent debt, and as you must make the repayments each month, it helps provide structure to your repayments and budget. Loans are less flexible than credit cards as generally you can only make the agreed repayments and there may be penalties attached if you want to repay the balance of the loan early. Also unfortunately, those with poor credit scores often will not get the best interest rates. Savings The interest paid on savings is usually far less than interest charged on borrowing, so paying off debts with savings makes sense. Sound financial planning is always to have an emergency cash fund and this can be part of your plan once your debts are cleared. If you are disciplined after paying off debts, don t cut the credit cards lock them away strictly in case of an emergency. Re mortgage Mortgages are simply a special type of secured loan generally with cheaper rates. Borrowing the money on your existing mortgage, or re mortgaging to a new cheaper deal, is often, though not always, the best move. Remember, mortgage debts are paid off over a long time, and 5% over 20 years is more expensive than 10% over five years. Plus you may be forced to increase your life assurance and other associated costs if mortgage debts increase. Your mortgage is a priority debt and if you are either missing payments or not able to meet the full cost you may be able to negotiate to pay interest only or take a payment holiday, depending on the type of mortgage you have. If you are planning this kind of move it is always advisable to seek independent financial advice. Secured Loans This is a loan of last resort and if you fail to repay it you can lose your house. However, in certain circumstances, it is an option. Those with expensive debts and some (not too substantial) credit history problems may be able to cut their interest rate this way.

4 Check Credit Reference Files Those rejected from credit card or personal loan lending without an obviously poor credit history should check their information held by the credit reference agencies Equifax, Experian and Call- Credit Call Credit Check Entitlement To Benefits You may be entitled to a range of benefits, tax credits or grants you aren t aware of. Budget & Reduce Outgoings Moneysaving is possible on everyday spending by moving to better products and very importantly, by budgeting effectively to allow quicker and easier debt repayments. If you have debt problems then doing a budget is crucial. Even if the above solutions are working, getting a handle on what you spend will help future finances. A big problem with most budgets is they don t work, and then people give up and so the cycle goes on. They don t work because there is a disconnection between what is actually happening with your spending and what is written on the budget planner. It is no good writing 20 per week spend on socialising if you are spending 100, the only person you are fooling is yourself. If you are struggling to get your finances in order by yourself there are a numbr of specialist organisations who can offer your further help and assisstance. Debt Counselling. If you are consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets. It s really important you avoid any of the agencies that advertise debt help or management on the TV or in red top newspapers. They are commercial companies who charge for their services. Places to get FREE advice are Consumer Credit Counselling Service , National Debtline , Citizens Advice or visit your local CAB centre, or come and see one of the Welfare Advisers. Debts Causing Depression/Relationship Problems? Debt problems can be all pervasive - if you're having problems it can affect your academic work, your relationships and your personal well being. If you are having trouble coping with your debts and you want someone to talk to the Counselling Service, or The Samaritans are always there to help or phone If you're worried about your relationship then Relate has lots of useful information too.

5 One important thing to remember about debt is you're not alone. If you have taken some action like making reduced payments to your creditors it is very unlikely to ruin your credit rating forever. Interest Rates: This article makes a lot of references to interest rates and they are big way of saving money, but many people do not understand how interest is calculated. Here is a simple explanation of how interest is calculated so you will be able to compare the products you have. Many credit cards display the Annual Percentage Rate (APR) in monthly terms so you should ensure you are comparing like with like and in this case multiply the rate by 12, or by 365 if the daily rate is given as is the case with most mortgages. If you borrow money at a 5% interest rate for a year, it will cost you 5% of the amount borrowed to do so, which will need to be repaid along with the original money you borrowed. Interest rates are usually quoted annually, but not always, so do check. Example How much does it cost to borrow 1,000 at 10% then repay it six months later? Let s start with a simple sum; one year at 10% would cost you 100 (ten percent of 1,000). Therefore over six months you d pay about a half of that, in other words 50. It really is almost as simple as that. This is almost correct because interest on money that is owed is calculated by a 'compound' interest calculation, so if you miss a payment the amount that should have been paid is added to the debt (along with any charges) and the interest is calculated on the new balance. Thus, the payments increase as the debt you have has increased.