Currently interest rates are low due to the low state of the bank of England base rate. This has encouraged people to take on more and more credit in the belief that these debts are affordable. What this actually means is that at present even those people that think they can afford the repayments of credit may begin to struggle should interest rates begin to rise which is what they are predicted to do shortly according to leading experts in this field. If however, you are already struggling with your debts the situation is only likely to get worse. 

      Today is the time to begin to think about how you are going to get out of debt and build an action plan to reach your goal of making yourself ‘debt free’. 

      Congratulations! The very fact that you are reading this article means that you have made the first step to facing the problem and getting rid of your debt. Make no mistake your credit is your debt. You should begin to call it this as this will help you to realise your situation.  

How bad is your debt situation? 

      The next step is to build a table of your current financial situation. List on the left hand side all your monthly incomings including your wages (after deductions like tax and national insurance), benefits, rent and any other income you have. Next on the right hand side list all your monthly outgoings apart from your debts. This should include your mortgage, rent, bills, food expenses, car or travel expenses, insurance, childcare and any other outgoings that you have. Now deduct your total outgoings from your total incomings and the figure that you have is your ‘maximum disposable income’ (MDI). Next write down all your debts and your monthly repayments. This may be scary but the sooner you face up to these and acknowledge these the sooner you can begin to do something about it. Now compare your total debt repayments to your maximum disposable income figure (MDI). You will find yourself in one of the following three situations; 
 

1) Your MDI figure is more than your monthly debt repayments.

Should you find yourself in this situation you should consider increasing your debt repayments. Do not increase them to more than your MDI figure or you will be over committing yourself. However, by increasing your repayments you will pay off your debts sooner and so will pay less overall interest. This is far more cost effective that putting this extra money into a savings account. 

2) Your monthly repayments exceed your MDI figure.

If you are in this situation you will be in a ‘state of increasing debt’. This is a worrying and scary place to be. You are probably struggling with your repayments which are likely to be causing you significant stress. If not, you are perhaps only at this stage realising the situation you are in. Don’t panic as this is the time when we will begin to recontroll your finances effectively. Often those in this situation resort to drawing cash on one credit card to make minimum payments on another. This is what we call ‘robbing Peter to pay Paul’. STOP! This is not effective management of your finances – don’t kid yourself. In fact what you are doing is making the situation worse. Credit card companies charge high fees for withdrawing cash from cards. You are also paying interest on this money twice. You are therefore getting yourself in more debt and this will snowball your finances further out of control. Let’s have a look at how to turn this around. 

3) The two figures are more or less the same.

Don’t for one moment congratulate yourself. You are in debt. You are just about managing to make your repayments. You need to ask yourself some of the following questions;

• Where is money going to come from to deal with emergencies? Your credit card is not the answer.
• How would you cope if interest rates rise? This will increase all your repayments.
• What would you do if child care costs rise.
• What would you do if your travel costs increase train, petrol and insurance prices?

Any of your outgoings could and probably will rise. Wages don’t tend to rise at the same level as rising interest rates. They mostly tend to get left behind with inflation. You could soon find your self in situation number 2. You are effectively walking a tipe rope and need to get yourself on safe ground.  

Let’s have a look then at how you can improve your situation with the following guidance. 

Guidance – Increasing your income 

• Ask for a pay rise. If you don’t ask you won’t get!
• Consider working more hours or doing regular overtime.
• Look for a promotion or to change jobs to higher paid employer.
• Look for a second job to supplement your income.
• Claim every state benefits as you can – call the benefit enquiry line on 0800 88 22 00.
• Consider a lodger – a great source of additional income to the household.
• Sell any unwanted items. This could be through a car boot sale or over the internet on www.ebay.co.uk or www.amazon.co.uk/marketplace
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Guidance – Reducing your outgoings 

• Reduce your food bill by buying stores own branded products instead of more expensive brands.
• Use supermarket vouchers and coupons and take part in their award schemes.
• Cut down on takeaways – these are expensive and unnecessary.
• Take a packed lunch to work. This is far cheaper than buying lunch from the local sandwich shop every day.
• Give up smoking – this will save you a small fortune.
• Cut down on child care costs by asking friends and family to help.
• Switch utility providers. Shop around for the cheapest deals on phones, electric, gas and water – it costs nothing to change suppliers.
• Set up direct debits. This can gain you substantial discounts particularly with utility companies.
• Shop around for insurance – you will be surprised at the savings you could make.
• Ask yourself ‘do you really need all the things listed on your outgoings list?’. Cancel things like gym memberships. It is a lot cheaper to pay for the facilities at your local authority leisure centre when and if you use them.

Guidance – credit cards 

• Cut them up! Remember a credit limit is not money you have to spend it is the amount that the company is willing to get you in debt. Don’t use them again.
• Cancel any cards with nil balances. They are only a temptation for the future to get back in debt. You are moving forward not backwards.
• Transfer your balances to those companies that offer 0% on balance transfers – and change them again a month before your 0% offer changes. Watch out though for those companies who have begun to charge fees for doing this.
• Use your savings to pay off your credit cards. There is no point in getting 3% interest on your savings and meanwhile paying 10% on your credit card balances.
• Pay more than the minimum payment on your credit card balance if and when you can. The longer that balance stay there the more interest you are paying.
• If you have more than one card pay off the most you can afford on the card with the highest interest first. Pay the minimum payments on the rest. When the highest interest card is paid off cancel the account and move on to the next. This way you minimalise the overall interest you are charged.
• If you cannot afford the minimum payments on any of the cards contact the companies and make arrangements to pay lower monthly repayments and include a budget planner of what you can afford. Ask that they freeze your interest while you get yourself out of the situation that you are in.

Guidance – Loans and consolidation. 

Consolidating all your credit into one loan can be beneficial. It can provide a simpler way to manage your finances. It will prevent you having many different repayments going out of your bank at different times of the month and never being able to see how much you actually have to spend. It can also sometimes mean reducing the overall interest you are paying. However you need to be careful;

• Check that your repayments are decreasing due to the interest rate reducing and that your debts have not just been spread over a longer period.
• Check the early repayment charges on your other credit/loans as these can be high and sometimes mean the consolidation route is not cost effective.
• Shop around for the best rates. Use a broker who will shop around for you but ask about any fees that they may charge. Ask if the brokers that you speak to are quoting you on the best rate that you qualify for or quoting you on a typical rate. If they are quoting you on a typical rate it is likely that you will be turned down or the rate will change when you send off all your application to them.
• Ask about early settlement penalties on this loan if you could afford to pay it off early and/or pay extra payments.

Guidance – credit ratings 

There are two main credit reference agencies in the UK. These are Experian and Equifax. You can write to these and request to see a copy of your credit file. Under the Data Protection Act you can ask to see any information companies have on you at any time. These two agencies normally ask you to send a £2 cheque for administrative purposes with your request for the file. Go through your file carefully. If there is incorrect information on the file about you there is an appeal process you can follow to get this information removed. You can also ask that notes be entered on your file therefore giving explanations to issues that show on the file. Visit their websites for more information. 
 

If you have exhausted the above advice and guidance and you are still struggling with debt you may find the following contacts useful; 

• Citizens Advice Bureaux  www.adviceguide.org.uk
• Consumer Credit Counselling Service 0800 138 111 www.cccs.co.uk

To speak to an expert in secured loans and to go through all the secured loans options available to you please visit www.easyukloans.co.uk

October 2007