Consumer rights expert Martyn James runs through everything you need to know about getting on top of your debt this year
It’s a new year and you’ve decided to take on your finances.
You’ve taken a deep breath and sat down with your laptop or your phone and taken a look at your spending… and had a nasty surprise. Don’t feel despondent. Millions of people all across the UK right now are experiencing exactly the same feelings. You are not alone. So let’s tackle those debts.
What to do if you’ve overspent
First things first, if you’ve ordered goods or services online then in most cases you have a 14 day window during which you can change your mind and cancel the purchase and return what you’ve bought. So if you’ve got buyer’s regret from the sales, just get in touch with the retailers and cancel the order!
Keep your budget basic
Dealing with your spending is depressing. So keep it brief when making a budget. Give yourself a maximum of 15 to 30 minutes to make a mini budget that just covers your main incomings and outgoings each month. Don’t do this in silence – it makes it so much worse.
Pop on some music or stick the tele on in the background. Set a timer on your phone or clock too so you know when to pack the budget away and get on with something more fun. Make sure you note down:
- Any loans or credit agreements
- Mortgage or rent
- Insurance
- Credit card payments (average this)
- Energy bill
- Council tax
- Water bill
- Telecommunications bills
These are your main expenses. We can reduce these by negotiating better deals with new or existing service providers but these are the things you have to pay. In a separate column, guestimate what you spend on:
- Food
- Transport
- Entertainment
- Eating out and other expenses
- Kids and other dependants
If this seems a bit overwhelming, then free debt charity StepChange has a simple budget maker on its website. This is the industry standard ‘income and expenditure form’ (I&E) that financial or utilities firms will ask you to fill out if you need support with your bills. So do this once and you won’t have to do it again.
What happens next?
There you go – you’ve done the hard bit. Give yourself a break/reward! Take a day off budgeting. Okay, when you return take a deep breath because it’s time to get some help. If you have no money left over each month, or what you have will not cover an emergency, then you are the very definition of being in financial difficulties.
This means all regulated businesses are obliged to come up with solutions tailored to your individual circumstances to help you get through the situation. This might involve anything from reduced payments to creative ways to help you reduce your expenditure.
But wait! Even if you have some money left over each month, but not enough to cover an emergency, like the car breaking down or an unexpected bill, then you may also be considered to be in financial difficulties. Don’t try to figure this out yourself though. Contact the businesses you owe money to and ask them to help you.
If you only need a few months to get back on top of your cash, speak to your bank to see if they can give you a temporary overdraft or a payment holiday on any money you owe them. Your bank has an obligation to do what it can to try to help not make the situation worse.
Your bank isn’t going to write off everything you’ve spent, but it can give you a break on charges and interest until you’re back on top of your finances. If your bank or credit provider refuses to help you, or makes the situation worse, make a complaint to the Financial Ombudsman for free.
If you need longer-term help, then StepChange can step in and negotiate with your creditors. StepChange will ask you for that budget information you’ve already prepared and will set up a tailored plan, working out what you can afford to pay each month. They then contact all your creditors on your behalf.
Watch out for businesses online that claim to be official debt management services. Only StepChange offers this service for free. And don’t be fooled by firms offering ‘easy’ IVAs or bankruptcy solutions. These methods don’t magically sort out your debts and they can leave you without credit and with limited resources for years.
What if I want to reduce my own debts?
Good for you! There are a number of options for people who aren’t in dire financial difficulties but who want to ‘consolidate’ their debts in to more manageable payment plans. Some credit card deals allow you to transfer debts on to them for zero interest.
These are known as zero percent balance transfer cards. The cards give you a set timeframe where you don’t pay any interest on your purchases. Some of the best deals at the moment can give you up to two years of interest free payments.
A balance transfer card is effectively an interest free loan, allowing you to pay off a single or even multiple debts, including loans. You can also take out interest free purchase credit cards which give you free credit during a set timeframe, so you have access to funds in an emergency. However, it’s vital that you don’t forget the golden rules:
- Cut the card up on receipt and never use it. The interest on new purchases made on these cards is much higher than normal credit cards.
- Work out what you need to pay each month to clear the card during the interest-free payment, set that as your monthly payment and set up an automatic payment so the money vanishes from your account on the due date.
- Put the date the interest-free period expires – but one month before – in your diary or phone calendar. This is so you can find another deal if you haven’t paid everything off. Otherwise interest rates can be shockingly high.
MoneySavingExpert has all the latest deals on their website – and you can take a ‘soft’ credit check which will give you an idea of whether you will qualify for the card without affecting your credit reference file. If you’ve got debts outstanding that you can’t transfer on to a zero-interest credit card you might want to turn what’s left over in to a personal loan.
This is where you have to do a few calculations. You’ll get lower rates of interest if you borrow more but that simply means you’ll end up owing more money. You could consider reducing the amount you pay each month by agreeing to a longer payment term. But this will also cost you more in the long run.
Finally, don’t forget about credit unions. These amazing organisations are smaller versions of banks that are owned by their members and aren’t focusing on profiting from you. You can often get great lending deals from credit unions and they have good savings accounts too when you get back on top of your finances.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist
