An introduction to debt management
Anyone’s circumstances can change. Their income can go down, their expenses can go up, they might have a baby, move house, get a new job involving more travel… Whatever the reasons, the payments they could comfortably afford three years ago may be impossible to make today.
If that problem sounds familiar, remember you’re not the first person to borrow money - or to have to deal with changes to their financial situation. If you realise you can’t make your payments any more, it may be the first time you’ve been in this situation, but your lenders will (almost certainly) have ‘been there before’.
So you may be surprised to find they’re willing to listen to your story, help you explore your options, and do what they can to help you find a way of repaying the money you owe them in a way you can realistically afford - i.e. more slowly than you originally agreed.
Having said that, they can’t help if they don’t know you’re struggling financially. That’s why it’s vital you get in touch with your lenders - or ask professionals to do it on your behalf.
A ‘debt management plan’ is a repayment plan that takes into account the fact that your situation has changed and you simply can’t keep up with your repayments any more. It involves talking to your lenders and telling them what you can realistically commit to paying every month once you’ve taken care of all your essential costs, from your mortgage/rent and food costs to your utility bills and essential transport costs.
Your unsecured lenders should understand that paying for these essential expenses has to be your top priority, and they may well agree to accept a pro rata (i.e. in relation to how much you owe them) portion of your disposable income (the income that’s left over once you’ve taken into account all your essential costs).
It’s up to you whether you talk to them on your own or ask a debt management organisation to do it for you.
Some people will prefer to do it on their own, maybe because they don’t want anyone else involved in their financial affairs, or maybe because they’re keen to save themselves the fee that the debt management organisation may charge.
Others would rather get some professional help so they don’t have to do all the calculations, negotiations, payments, etc. - they’d rather hand it all over to professionals, make one monthly payment and leave the rest to their debt management representative.
Either way, there are ‘cons’ as well as ‘pros’ associated with debt management. For example, repaying a debt more slowly will mean you’re defaulting on your agreement (not sticking to the terms you originally agreed to) and this will stay on your credit report for six years, which can make it harder and/or more expensive to get further credit during that time. It can also add to the overall cost of repaying your debt, since you’ll be paying interest for longer (unless your lenders agreed to freeze interest on your debt - or reduce it sufficiently).
Having said that, your lenders wouldn’t accept lower payments unless you were genuinely unable to keep up with the payments you originally agreed to make - so if you’re in that situation, there’s a fair chance you will have damaged your credit rating already.
Further reading
You can find more helpful advice on debt management here.
IVA (Individual Voluntary Arrangement) or Debt Management Solutions
While seeking debt solutions most people are debating between Individual Voluntary Arrangement (IVA) and Debt Management solutions. To learn which of the two options is best suited for you, read ahead and find out for yourself. Though both are capable of preventing you having to resort to bankruptcy.
Individual Voluntary Arrangement commonly known as IVA is a formal agreement between a debtor and his creditors while Debt Management Plan is not.
The main difference between the two is that IVA is legally binding whereas Debt Management is not, which can cause problems if the creditors decide to change the repayment terms. The main idea behind both options is to pay a reduced, affordable amount regularly each month. However in IVA, the interest charges will be frozen. Moreover, the debt will be written off on behalf of the creditor after five years. Under Debt Management, even though you pay an affordable amount, there is no provision for writing off your debt as there is no time limit involved to pay the debt. It can go on for a longer term, or until the full amount is paid.
Since the IVA is legally binding, the creditor cannot pressurize the debtor or change his mind. Thus, it is more secure. The Debt Management Plan does not offer this solution. Since it is not bound by law, the creditor can change the terms and conditions at his convenience.
The cost of administration is lower than IVA, thus enabling higher payments for creditors. It is always advisable to read the terms and conditions of both forms of solutions before making an informed decision. Beware of huge interest charges and other fees involved in the two processes.
One downside on an IVA however, is the credit rating of the debtor is likely to be affected more severely, which is not true with Debt Management.
Which one to choose greatly depends on the amount you owe and your income. By all means, the help of a professional must be sought if you are not completely sure which financial route is best for you
Tackling Student Debt
As the new student year is on the horizon, many students will soon realise that university life is not cheap. Despite the increasing expense of further education, there are numerous was to stay in the black and enjoy yourself while you are at it!
If you are about to start university this autumn you could graduate with on average £30,000 in personal debt over the course of your studies. With an estimated expenditure of £10,000 per year over the course of a 3 year degree, there are numerous ways to help cut this figure and reduce your overall level of debt.
Being intelligent with your accommodation choice is just one way to save money over the course of your student career - “Consider staying in shared halls during your second year, not just your first year” suggests Amy Holt, a third year student at Birmingham University. The tendency to move into private accommodation may be somewhat appealing during your later university years, but this can often come with added costs.
It is estimated that students spend around £2,900 on accommodation in their first year of university, rising to £3,300 in second and third years. A saving of around £300 over a year may not sound like much but over a 5 year degree this can be a considerable reduction in your student debt levels - which makes the appeal of university subsidised accommodation an attractive prospect.
At some point, you may find yourself contacted by a debt collection agency, but this is not always as intimidating as it is made out to be. Keep in mind there are laws that these companies must adhere to, and they are acting on behalf of whoever your debt is owed to. If you are courteous and professional while speaking to a representative, they should return the favor.
Along with some of our other money saving tips, we will be continuing a series of student debt management ideas to keep your debt levels to a minimum during your student years.
Succesful Debt Management
Beating debt can be a real task, but you can find success if you know where to look for help. If you find yourself overwhelmed by money troubles, there are a number of debt management resources available for you both online, via phone or in person. Its all about choosing the right option for your own circumstances.
Sometimes it can be easier to look something up online, especially if you are embarrassed about what someone may think of you, but also if you want to remain anonymous about the whole process. However, the qualtiy of advice found online can vary quite dramatically and be wary of some older, more outdated articles which may be misleading. I would also recommend ringing one of the many debt charities, such as the national debtline, that have been established to offer free and confidential money management advice.
A good place to start would be to read all of the debt advice articles on this site - i will be covering a wide range of article topics, ranging from credit card management, budgeting tips and learning how to make your money work harder in savings accounts and bonds. There is also an upcoming site, my debt options, which aims to outline in full, what options are available if you ever find yourself in debt.
Whatever your circumstances there will always be a debt management resource that can be used in a positive way. Sometimes you just have to do a little bit of searching to find the resource that works for you.
Keeping track of your cash
Spending less than you earn is an easy concept to understand, but in practice its not always that simple. By keeping track of your spending on a weekly, or even daily basis can help you from furthering your debt.
One of the main problems with financial planning is not keeping track of small personal expenses, like toiletries, lunches and other impulse buys. The things that we don’t keep receipts for are the worst, as they become increasingly difficult to monitor, and are often forgotten about.
If this sort of spending sounds familiar, you may have to resort to some tough budgeting measures to keep you on the straight and narrow. Alot yourself a daily budget, in line with your spending expectations for the week. So whether that is £1, £5 or even £50 per day, that is all you are allowed to spend. Don’t be tempted to use that credit card if you go over your daily budget.
This strict way of restricting your spending can be a great way to keep those impulse buys at bay, and will teach you the value of thoughtful financial planning.
Have you been driven to Debt?
Filed under: Debt Management, Money Saving Tips, Mortgages, Savings
As if rising utility bills aren’t enough, now motoring can drive you further into debt. It’s a little bit of a catch 22 situation, as most work requires you to drive, but with rising costs for running a car, this can put you in a difficult situation.
If you are in some financial difficulty and you rely on a car to get around, take note of some of these car insurance money saving tips and you can save a few pennies along the way.
When completing a car insurance form:
- Check if your car has an advanced security device. If so, note the model and number and let your insurers know. They may offer some form of discount.
- If you have had a long period of ‘no claims, note this thoroughly as you will be rewarded with lower premiums.
- If you are an advanced driver ie: you have passed your PassPlus exam, again note this on the application as some insurers reward drivers who have this additional certificate.
- Make sure you obtain quotes from a large number of insurers before signing a contract. There are a number of car insurance comparison sites which will find you the best deal based on your car and personal details.
By following a few of these simple tips you can ensure that the pleasure of driving doesn’t drive you further into the red.
How to avoid Debt
We talk alot on this blog about how to get yourself out of debt, but we should also consider how to avoid debt in the first instance. With so many financial pressures in todays society, we should always be aware of the well known idiom:
“Prevention is better than cure”
With that in mind, it is always advisable to think before you act, because once you are in debt, it can be a vicious spiral of more and more borrowing.
If you are close to the being in the red, consider a few of these simple steps:
Spend within your means - Never intentionally spend outside your budget. The ‘buy now and think later’ attitude is a surefire way to get yourself into debt. Understand your earnings, take away your monthly expenditure and that is your expendable income.
Keep detailed financial records - Set up a simple excel spreadsheet to calculate your spending. Every time you make a purchase, add this to your spreadsheet and this will allow you to understand where your money is going. Don’t miss anything out, even small purchases add up to a considerable amount over a month.
Avoid using credit cards at every opportunity - By adding to your credit card budget when you can spend via other means, you are increasing the likelihood of overspending or forgetting about this outstanding balance. Relying on varying forms of credit for purchases can lead to a dependency on credit cards for purchases, when in reality, you can’t afford the item in the first place.
Think about your savings - There are various ways to increase your assets, through popular saving methods such as ISA’s, savings accounts, bonds and stocks. If you are able to set money aside on a monthly basis, no matter how small, this can create a ‘nest egg’ for any tough financial spells later in your life.
If you are in debt already, you can take something from these tips. Being able to budget effectively is one of the most important aspects of keeping a healthy bank balance.
How to manage your Credit more effectively
Having credit is not all bad if managed correctly, whether it allows you to buy that dream house, get you out of tight spot or be used to build yourself a solid credit rating. Poor management however, are where problems can arise.
Some basic pointers when using credit:
- Only buy what you can afford to repay - One mantra i have always tried to use is this one. With the latest shiney gadgets, or must have accessories being paraded in our faces on a day to day basis, it can be difficult to resist the urge to spend. But, do you really need to make that purchase? The buy now, consider the consequences later attitude is not ideal when facing 16.9% APR charges!
- Make sure your payments are frequent and in full - If possible, always try to pay off your balances in full at the end of the month. Whether that is a credit card purchase, or your mortgage payments, the same rule applies. This enables you to both avoid any fees, and limit the amount of interest you pay to your credit supplier.
- Know your limits - If you have a £1,500 limit on your credit card, don’t go over it! You will probably pay through the nose for exceeding your limit.
- Keep track of your spending - Set up an online account that coincides with your credit card statements, that way you can quickly check your spend for that month and act accordingly. Most well known credit suppliers will be able to offer online account support.
- Keep an eye out for mistakes - Although many credit card companies offer insurance or protection against fraud, Credit card fraud does and will continue to exist for the foreseeable future. Keep a beady eye on your statements and check any unusual items out. Dont let any fraudulent purchases go unnoticed.
- Be sensible - Don’t apply for credit unless you really need it, or you are doing it for building your credit rating. Many people are under the impression they need credit, when in fact they don’t! Having that temptation there to spend can be problematic.
In the right hands, credit cards can be very useful, but unless you need to make a large purchase or are looking for the payment insurance - try and stick to cash or debit cards.
How to Budget Effectively
Budgeting is a key part of getting yourself free from Debt. If done properly, and believe me it can be tough, you can gradually pay off your outstanding credit while maintaining a ‘normal’ lifestyle.
Many times, spending can spiral out of control because you are unaware what monthly disposable income you have to hand. Budgeting is key to understanding exactly what you have, and what you will need to pay off during that month.
How to calculate your budget
This is best done on a monthly, or weekly basis as spending can fluctuate throughout the year, say for example more expenses during christmas time, summer, etc. I personally find it easiest to work on weekly figures, so calculate your income (’take home’) ater tax, and divide by 4 to give you a weekly budget. Say for example you earn £1,000 per month after tax, you have £250 per week available.
Calculate your outgoings, which can be broken down into bills: which includes credit card bills, mortage or rent, utilities, council tax, road tax etc. Then add up the additional weekly spend on food, shopping, mobile phone contracts, internet or anything else that will cost you money during that week. This will give a rough idea of where you are in terms of a weekly or monthly spend. Be sure you are honest here, if you buy lunch at work everyday, make sure you include it, you will confuse your finances if you leave anything out.
If your weekly spend exceeds your earnings:
If your budget exceeds your earnings, you are in trouble, you are living beyond your means. Every week you continue this trend, you are getting yourself further into debt. Take a step back, and look trhough your finances again. What expenses can you cut back on? Are there any unneccesary costs listed?
Things like alcohol, or clothes could be cut back whilst you get your finances back on track - you will probably have to make some sacrifices to deal with the overspend. Food shopping could be made cheaper by buying food from markets, which are notoriously cheaper than supermarkets. Could you switch utility providers for a better deal? Would you receive better car insurance premiums if you switched? All these questions may apply to your situation, so you will need to assess the key costs and try to tackle them.
What if your weekly spend is less than your earnings:
If you are spending less than you earn, you are doing extremely well, and are on the way to being free from debt. Put thast additional money into a high interest savings account, a cash ISA and make that money earn you interest. Alternatively, a a more sensible option would be to pay off some of your additional balance on credit cards or loans (if you are not charged for making over payments). This also effectively saves you money by cutting down your interest payments.
If you are able to save, then well done on budgeting correctly, but always keep your budgets up to date and ensure you are not overspending in any areas. The more on top of your finances you become, the better equipped you are to deal with any unforeseeable costs in the near future. Sticking to a budget may be tough, but is a surefire way to help manage and reduce your debt.
