We explain how to deal with your debts when things get tight.
Credit cards, mortgages, rent, overdrafts, personal loans, student loans, council tax, gas and electricity, hire-purchase agreements, store-cards, court fines, that tenner you borrowed from your friend last week. Debt comes in all shapes and forms and it's more than likely you owe in more way than one. So when it comes to getting your finances in order where do you start?
First, don't panic. Whilst eventually you will need to pay all of the money back, you don't need to attempt this in one go. Some debts are more important than others - the trick is to identify these as your starting point on the road to becoming debt free.
The most important debt is not necessarily the largest debt. Priority debts are those which have the severest consequences for non-payment. Whilst your mate might get a bit annoyed that it's been two weeks since he gave you that money for a cab home, it's more important to pay your utility bills, mortgage or rent, council tax and any court fines. Not paying these can result in penalties including having your gas or electricity supply cut off, repossession of your home or eviction from rented accommodation, frozen bank accounts, or bankruptcy.
Other forms of debt are non-priority. This category includes store cards, credit card debts, personal loans and overdrafts. Whilst impatient creditors chasing payment can make your life uncomfortable they won't result in essentials such as energy supplies and shelter being taken away. This is not to say they are not serious - creditors can approach the court to try regain the money owed to them, your credit-rating may be damaged, and hire-purchases such as cars may be repossessed. It is important to contact your creditor and explain the situation; if they don't know they can't be lenient.
The importance of these debts is determined by the interest rate that accompanies them. Store cards are notorious for their high interest rates, up to 30%, so cut them up, pay off the balance and cancel. Credit cards are also expensive with average APRs of 15% so put paying these off as next on the list. Remember, that whilst making the monthly minimum payment is better than nothing, simply doing this alone can extend the life of the debt by years and increase the size of the original debt massively. If your budget allows try to exceed the minimum payment.
Overdrafts are often seen as a convenient extension of a current account but interest rates can hover around 18%. At the end of the day the order of priority for these types of debt depends on the terms and conditions of your provider. Dig them out and start tackling the debt with the highest rate of interest first.
Student loans prove that large debts are not always a priority. These loans come with the lowest interest rate available, that of inflation, and so can be put on the backburner whilst you tackle the forms of debt mentioned above.
Once you've listed your debts in order of priority and have started tackling the top of the list don't simply put the others to the back of your mind. Contact all your creditors and let them know the situation. Many creditors may be happy to negotiate smaller repayments and even delay repayments but you will only find this out by talking to them.
Finally, avoid borrowing more money to pay off existing debts. If you are struggling to work out the priority from the non-priority debts, or need help contacting your creditors, contact your nearest Citizens Advice Bureaux who will be able to point you in the direction of free, impartial and confidential financial advice.
