DebtDrive - all about your money
It’s fine talking about budgeting and planning, but what if you’re really struggling to meet essential payments? What if you’re in debt now, or if you need some money urgently?
Before you do something you might regret, let us give you some information on what your options are.
It’s not just you – the average UK household debt (excluding mortgages) was £58,540 in June 2018 (The Money Charity).
Up to 8.3 million people in the UK are unable to pay off debts or household bills (National Audit Office).
UK households saw their annual outgoings surpass their income for the first time in nearly 30 years in 2017, according to the Office for National Statistics (ONS). This is partly because the bank rate has been very low for the past decade.
Debt and loans can be good. Yes, you heard right, taking out a credit card or loan can be good. Often you can benefit from interest free periods or low interest rates. In the UK we have a very low interest rate and borrowing to spread costs and pay back each month can be cheap money. The problem occurs when you keep borrowing or your income stops or reduces.
Having a good credit score is really important so read on to find out more.
Before you sign up for a credit card or expensive store card, it makes sense to think about whether you really need to borrow money.
DebtDrive is not only about getting out of debt but also about how to learn how to borrow wisely.
is the average in the UK (including mortgages) in June 2018 (The Money Charity)
is the average UK household debt excluding mortgages, on credit cards and to banks and other lenders in January 2019 (TUC from annual report)
is owed by individuals in the UK (Feb 18, Finder.com)
people already in serious financial difficulty (FCA study)
Different Types of debt
National Debtline list the different types of debt as:
Council tax arrears
Credit and store cards
Friends and family debt
Hire-purchase or conditional-sale debt
Magistrates’ court fines arrears
Parking penalty charges
Secured loan arrears
Social fund loans
Tax credit overpayments
The National Debtline plan
The National Debtline have a 4 step plan to dealing with debt.
- Increase your income – lots of people don’t get all the money they’re entitled to.
- Work out your personal budget – it’s essential to understand what you owe and your income.
- Deal with your priority debts – these have the most serious consequences if they’re not paid.
- Deal with your non-priority debts – these are where the creditors haven’t got extra powers to make you pay – e.g. they can’t take your home.
You can download this below under more Information, but it may be better to use the online version.
When things get tough
If for whatever reason you are struggling to pay bills it’s best to deal with the matter ASAP rather than wait until things become desperate. Avoid payday lenders and money lenders, which involve borrowing short term money at ridiculous rates.
If you want to try and work through this yourself, you need to take serious steps. First work out a financial plan – see our budget planner below. Prioritise your debt into:
- Emergencies – where you face court action, eviction, disconnection of utilities, or bailiff threat – in this case seek help immediately and always turn up to court hearings
- Priority debt – these have the biggest impact if not paid – e.g. tax, mortgage / rent payments, utility bills, council tax and court fines – these should be paid first
- Non-priority debts – you could be taken to court or have bailiffs instructed – loans, credit card bills, overdrafts – try and pay the minimum and avoid penalty charges
There are free support services available to you – we show you how to find a debt advisor.
How to pay off your debts
- Debt Management Plan (DMP) in England and Wales or Debt Arrangement Scheme (DAS) in Scotland – you use an adviser to propose a monthly payment scheme for your non-essential creditors.
- Full or Final Settlement Offer (F&F) – you offer to pay some (the majority) of the debt and they agree to then waive the debt – creditors are not obliged to agree, and you must have some money available to make the offer.
- Debt Relief Order (DRO) – known as Minimal assets Process (MAP) in Scotland – if you have few assets and low income
- Individual Voluntary Arrangement (IVA) – introduced in 1986 and needs an Insolvency Practitioner (IP) to set them up to split your payments between your creditors – they normally last 5 years and then debts are written off.
- Bankruptcy – Scottish equivalent is a Sequestration Order – you declare yourself unable to pay your debts (online now rather than through courts) so they are written off – it does have implications on seeking credit in future.
- Debt Consolidation – this normally involves using a debt adviser and taking a secured loan to roll multiple debts into one amount.
- Writing off debts – showing creditors that you have no income or assets and that this isn’t likely to change – e.g. if you have a serious illness.
- Administration order – if you have a County Court Judgement and two or more debts totalling less than £5,000 you apply to your local County Court.
UK Household credit as %-age income
The Office for Budget Responsibility forecasts from October 2018 show debt-to-income ratios increasing in coming years.
Care with borrowing
There are a lot of things to think about before you borrow money.
- Do you really need the money – any alternatives to spending?
- Are there any other ways to find the money – save first?
- Can you afford to pay it back?
If you do, then you need to work out the best way to borrow the money and how much it will cost you to repay it.
- What is the interest rate (APR)?
- Look for excessive additional charges
- Watch for penalties on non-payment
- Try and improve your credit history as you borrow
- Build the repayments into your budget
Good credit and good borrowing
In today’s fast moving world and especially in the UK we are classed as a credit driven society. We buy houses with mortgages and 82% of cars are bought on finance today (BusinessInsider.com). Credit has never been easier to obtain and special offers to take out loans and cards are available. So why not take advantage of the competitive market? In fact from a credit score point of view people who do not have a credit history fare less well than those with a good paying credit history.
Credit cards offer free periods if you pay the balance by the due date, so people can get in trouble borrowing. If our income stops for whatever reason and you are unable to pay the loan amount then troubles start.
Right now in the UK if you have a good credit score you can obtain a personal loan rate as low as 2.5% to 4%. But equally there are banks and other lenders offering personal loans for 12% – 16% dependent on term and amount. There are lenders out there charging 49% and 200%.
So please be careful with any of these organisations offering instant decision and quick decisions and immediate payments. These interest rates will always be a significant burden on your existing financial position, so shop around. Read on to find out ways to improve your credit score which in turn means you can obtain a better rate.
It's all about balance - some good loans
- Buying a washing machine on interest free credit over 9 months can be a good deal (providing it is genuine) and you’re not over committing yourself.
- You take out a debit card that is paid off each month and this gives you 30 or 60 days interest free period which can help with budgeting.
- You can use a competitive PCP plan rather than take out all your cash savings to buy a car.
So some credit and loans can be good when used in parallel to your normal budgeting plans. But never over stretch yourself with a large loan over a long period if you think there is a risk you would struggle to make the payments if something went wrong.
When things start to mount up and we start borrowing with high interest rates it becomes a problem. Remember the provider will give you credit but it’s your responsibility to pay it back. They will have also made it clear what the interest rates are and the penalties for non payment. So they pass the responsibility onto you.
There is a culture developing now whereby debtors are trying to become the victim and blame the lender for making it so easy. It does not really matter who is to blame once you get into debt – only you can sort it out.
I got help to get out of debt: Alison’s story
How to get out of debt
This video from the Citizens Advice Bureau gives a story about the first steps you can take to start to get out of debt.
StepChange are the UK’s leading debt charity – they helped 620,000 people in 2017. Go to their website.
If you are thinking of taking out a loan, then check options – this takes you to the Money Advice Service calculator which gives alternatives to Payday loans and also gives overall advice.
Take a test from the Money Advice Service to see how you are positioned and how you can get help.
Are you claiming all the benefits you can? See the Universal Credit Money Manager
Use the National Debtline My Money Steps free online confidential tool
How much will your credit card cost, or how quickly can you pay it off?
The BBC have a Debt test which quickly summarises your position and gives some guidance on what you can do.
Money Advice Service list of debt advisers
Download National Debtline Dealing with Debt PDF
StepChange statistics from January to June 2018 on personal debt in the UK