Today on my Weekly Debt Stories series I have a guest post from one of the countries leading debt experts, Sara Williams who runs the blog Debt Camel. I have known Sara for two years now and often reference her website to my readers with any debt questions I cannot answer. And I have used her site for many questions concerning my debt. She has the biggest wealth of debt content on her site and she helps so many people. Be that getting out of debt, to interest refunds to issues with pay day lenders. Here is her post.
Too much credit card debt?
Credit cards are often a useful way of spreading the cost of large purchases for many families. But the minimum repayments are low, so your balance can easily climb higher than you feel comfortable with.
It’s hard to keep a mental track if you and your partner both have cards. So if you don’t know what the total is, this would be a good time to check! Especially if the thought makes you feel a bit nervous…
How much is “too much”?
There isn’t a magic number here. It depends on your income and other expenses – if you have a good salary but a mortgage, car finance and children you will find it harder to manage 10k of credit card debt than someone on half your salary with fewer expenses.
What could change in the future matters – if you need a larger house or want to be able to retire, getting your credit card balance down now is a good idea.
Also what do you feel comfortable with? If you look at the total and wince, then follow your instincts and get a plan to pay it off.
Can you stop using your cards?
It’s easy to kid ourselves that we are using cards for sensible reasons – “I get cash back”, “I save the loyalty points for Christmas”, “it makes it easier to smooth payments through the month” etc
Those are all good points, if you are repaying a lot more than the minimum most months and the total amount is falling fast.
But are you fooling yourself? Try not using your cards for a whole month. If you can’t do this, then you probably do have too much already on your credit cards and it’s probably getting worse each month.
The sooner you take action, the easier it is!
The options you have mainly depend on how serious your problem is and how soon you have caught it.
Improving your situation
All the options here you can do yourself and may let you get back in control of your finances.
First, can you make some cutbacks so you have more money to pay down the card balances every month? This creates a virtuous circle – the more you can pay off, the less interest you get charged so it gets easier as you go on.
Next, can you get a 0% balance transfer? You will need a good credit rating to get a balance transfer – if yours isn’t quite good enough you may find that 6 months or a year of working hard at overpaying your cards has reduced your balances so your credit score improves enough to get a 0% deal.
Consolidating debt by getting a low-cost loan may be a good idea, but if you have a lot of debt it often isn’t possible. The golden rules for debt consolidation are:
- close down any credit card you do refinance, don’t keep one open “for emergencies”;
- only refinance problem debt – not a card on 0% or a loan that finishes soon;
- don’t remortgage or get a secured loan unless you have taken debt advice first. There are other ways to tackle unsecured debt, but when you convert it into secured debt your house is at risk.
If that’s not enough
When those “DIY” ideas won’t make enough difference, you need to get some outside help.
If you just have one large credit card balance, you can phone them up and say you can’t make the minimum repayments and ask for “an arrangement to pay” and for interest to be frozen on your debt. They will probably want you to complete a form showing your income and expenditure, so they can see what you can afford.
With more debts, it is often better to set up a Debt Management Plan (DMP), where you make a single affordable payment each month which is then divided between your creditors. Here interest is usually frozen, so you debts really start dropping. If you think you can sort out your debts if only they stopped adding interest, a DMP may well be your best solution. StepChange run DMPs for hundreds of thousands of people, so contact them to find out more.
But how long would a DMP last? If the amount you can afford to pay is low, then you should probably investigate the different sorts of insolvency. Everyone has heard of bankruptcy and it is isn’t as bad as you would expect – you don’t need to go to court, most people don’t make any monthly payments and most people keep all their possessions!.
In England, Wales and Northern Ireland there are two other types of insolvency:
- Individual Voluntary Arrangements can work well if you have a house with equity to protect
- Debt Relief Orders are often perfect if you owe under £20,000, are renting and have little money for your debts.
Getting some expert help to decide
With several debts, or if you feel very nervous, it’s usually best to talk to a debt adviser who can look at all your options and help you decide. Even if you think your problem isn’t that serious, a good debt adviser will be happy to confirm this and could have some helpful tips for you.
Some people like to use a local advice service, such as Citizens Advice, where you can see an adviser face to face.
But if your working hours make this difficult or you would prefer to talk on the phone, then National Debtline provides advice for all parts of the UK. They have a sister service, Business Debtline, if you or your partner are self-employed or own a small limited company.
Both Citizens Advice and National Debtline can give good advice on all your options, but it’s your choice what you want to do. If you wait until your credit cards are maxed out and you are desperate it is very stressful and you may have fewer options to choose from, so don’t delay!
I have lots of content in this series of debt stories, with many people sharing their stories and how their debt was repaid, here is the last post and includes links to all the others in the series.