With rising living costs and the easy availability of credit, it can be easy to fall into debt. There are some practical and effective strategies that you can use to manage your debt, if you find yourself overwhelmed with money worries. So, whether you are dealing with a high-interest credit card debt, personal loans or mortgage payments, read through our tips below.
First understand your debt. Make a list of all your debts and financial obligations. Note the amount owed, the interest rate and the monthly payment. This will give you a comprehensive overview of your debt situation.
Next prioritise. Some debts will carry higher interest rates, which can cause your total debt to increase more quickly, focus on paying these off first. This is known as the ‘avalanche method’ – you eliminate your most expensive debts first. Make the minimum monthly payments on all your debts, but aim to pay extra towards the debt with the highest interest, once you’ve paid this debt off move to the next highest and so on.
Create a budget. A personal budget should detail your income, essential expenses (rent, utilities, groceries etc.) and allocations for debt repayments. The aim is to identify areas where you can reduce your spending and then reallocate those funds towards paying off debt. Be realistic – ensure you support your basic needs whilst maximising any debt repayments.
If you have multiple debts it can be useful to consolidate them. Combine them all into one single loan, with a lower interest rate. This can help simplify your payments and potentially reduce the amount of interest you pay. However, do read the fine print and consider the terms on which the loan is offered, as extending the loan time can potentially lead to paying more interest over time.
If you are struggling to meet your repayments talk to your creditors. Negotiate with your creditors as they may be willing to reduce interest rates or extend payment periods. Being proactive and transparent can prevent your account being sent to a debt collections agency, which could have a negative impact on your credit score.
Debt Management Plans (DMPs) are available from some Financial Advisers and debt management companies. You can pay a single monthly payment to the service provider, who will then distribute this to your creditors. However, it is important to consider the fees involved with DMPs and how entering into one may impact your credit score.
If you have significant financial debt then you could consider an Individual Voluntary Arrangement (IVA). An IVA is a formal agreement between you and your creditors, mediated by an insolvency practioner. It is usually a fixed agreement to pay off a portion of your debt over a five-year period. At the end of the IVA, any remaining debt is written off. IVA’s do offer a way out of significant debt but they have serious implications on your credit rating and potentially your current and future employment.
For individuals who owe less than £30,000, have minimal spare income (less than £75 per month), and do not own their own home Debt Relief Orders (DROs) can provide a solution. If you have a DRO you can halt debt payments, including interest, for a 12-month period, but during this time you must adhere to certain restrictions. After this period, you are released from debts and restrictions, unless your financial situation improves, which could lead to the cancellation of the DRO. And, if you fail to follow the rules the DRO could be extended. Essential payments, such as rent, bills, student loans, court fines and some other debts are not covered by a DRO. You will be prohibited from borrowing more than £500, without disclosing the DRO to the lender, acting as a company director, creating or promoting a company without permission, managing a business without informing business partners and opening a bank account without disclosure. From 28 June 2024 the total amount of debt that can be covered by a DRO will increase from £30,000 to £50,000 for non-home owners.
The last resort is bankruptcy. Bankruptcy will have a severe and long-lasting impact on your credit history. However, it can release you from most debts after a certain time period (typically one year). It will also restrict your financial freedom, affecting your ability to obtain credit, and may result in the loss of assets, including your home. Professional financial advice should be sought before considering bankruptcy.
The team at CKLG are always on hand to help support you and your business with making practical financial decisions. Give the team a call on 01223 810100 if you’d like support with maintaining your financial health.
