‘D’ is for debt

According to a survey by Britain’s Consumer Credit Counseling Service, personal debt levels in the UK have risen alarmingly in the last two years, particularly for people under the age of 25.

Increasing numbers of young people are failing to stay on top of their unsecured borrowings. This growing trend for debt is a concern. Bankruptcy figures are soaring, and the rise is mainly due to young people overspending on credit cards, consumer store credit and personal loans. Experts believe that these trends are a direct result of the desensitisation of borrowing. Debt is seen as normal – credit cards, for example, have blurred the distinction between borrowing and spending.

Student loans also force young people into early borrowing. The majority of students will leave college or university with a high level of debt – on average owing a minimum of £15,000 until their mid-thirties. This can have the knock-on effect of forcing them to take out new loans to make ends meet, stretching themselves too far financially.

One specific problem area is the use of new borrowing to meet the repayments on older debt. Once this type of cycle starts, it becomes extremely difficult to get back in credit.

Getting out of debt is unfortunately not a quick and easy process. It requires patience and, most importantly, discipline. The first step is to take an honest look at your financial situation. If you are deep enough in debt, bankruptcy may be your only option. Bankruptcy is a serious matter and should be avoided at all costs.

Even if you are up to your eyeballs in debt, it doesn’t mean you have to declare yourself bankrupt. Bankruptcy is a way of freeing you from debts that you simply cannot pay so that you can make a fresh start with some restrictions. It will almost certainly involve the closure of any business you are involved in, dismissal of any employees and the loss of possessions of value, possibly your house if you have one. Bankruptcy is a last resort and all other options should be explored before considering this route.

The art of negotiation

It’s vital that you talk to your creditors. In matters of money, the ostrich approach just won’t wash. In most cases, where debtors show that they are willing to make a plan to pay off their debts in full, creditors are happy to agree an arrangement that will make the repayments easier. If you contact your creditors to set up a repayment plan, it shows you are serious about tackling your problems.

Hold the shopping

You will never be able to get out of debt if you carry on borrowing. The first step is to get rid of your credit cards and store cards – cut them up. This is a simple step that will help reduce your spending, a crucial part of the plan.

What’s my income?

Sit down and work out a budget. This needs to be as accurate as possible so be brutally honest about what your necessary expenses are. Getting out of debt is going to require sacrifices, so eating out and nights at the pub will have to be put on hold for a while. Your budgeting process will let you know what your available income is after deducting all of your expenses, excluding debt repayments.

Rank and file

Give each of your debts a ranking according to how urgent they are. The companies that are providing you with essential services such electricity, gas, water and your mortgage are the most important and should be at the top of your payment list. Once you have taken care of these, you can start tackling the credit and store card debts.

The snowball effect

The most effective method of paying off your expensive credit and store card debts and personal loans is a technique called snowballing. Once you have paid for all essential services, you need to start paying the minimum repayment on all other debt. Any excess income that you have after paying your essential bills should be used to pay off the creditor you owe the least to, in order to clear this debt as quickly as possible.

Once this debt has been paid you will have your normal excess income plus the amount that was being used to pay off the first debt to tackle the next smallest debt. As these smaller debts get paid off, your excess income becomes larger and larger, hence the snowballing effect, and you will be able to pay off those larger debts in far less time. Snowballing works extremely well but it relies on intense discipline. You have to stick to your budget religiously and most importantly, once you have cleared your debts, refrain from slipping back into old bad habits.

The cost of consolidation

Debt consolidation is a strategy sometimes used by people to better manage their debt problems. Rather than paying off several separate bills each month, you consolidate your debts with a financial institution that will arrange for you to pay one lower monthly repayment.

Debt consolidation sounds like a good idea on the surface, but it should only be considered if your income is simply not big enough to cover your debts. The monthly repayments may be smaller, but this is because you are paying off your debts over a longer period and at higher interest rates. It’s a much more costly option in the long run.

Need more help?

If you need independent advice on getting out of debt, your first port of call should be the Citizens Advice Bureau (CAB). There are about 2,000 Citizens Advice Bureaux across the country and they offer free, confidential debt advice.

They will also advise you as to your benefit entitlements and legal rights and will represent you in court if necessary. To find your nearest CAB, try your local Yellow Pages, call directory inquiries, or search their website: www.nacab.org.uk.

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