There were nearly 13,000 home repossessions in the first quarter of this year, and this figure is still rising – along with the number of mortgages in arrears. But, if you are having difficulties, proper debt advice and debt help at the right stage can make all the difference between losing and keeping your home.
The warning signs of debt problems
Here are some of the most common signs that you could have an underlying issue with your debt management.
1. Going deeper into debt
Do you spend more than you earn? Is there more month than you’ve got money for?
This is a common sign that either you’re not budgeting correctly, or that you have an underlying problem with your finances. It may take weeks, months or even years before it becomes a serious debt problem but if you’re spending more than you earn it won’t be long before the credit runs dry. When that happens, what next? It may be too late to take out another debt consolidation loan, and you may be threatened with bankruptcy by creditors if you cannot meet their repayments, interest and charges. This can be avoided by drawing up a sensible budget of how much money you receive each month, and how much you spend on essential living costs (rent/mortgage, utility bills, travel to work, food, council tax etc.) and unsecured debt repayments. If you don’t have enough money after you’ve paid your essential items to repay your unsecured balances then it’s time to seek some debt help. You may benefit from a Debt Management Plan (DMP) or an Individual Voluntary Arrangement (IVA), as these help to regain control of finances whilst still repaying your unsecured balances. There are many reputable companies who can assist, including The Debt People and Chiltern Debt Management. These can offer a number of professional debt solutions to ease your finances and improve your situation.
2. Misuse of your credit card
If you regularly use your plastic to pay bills, buy fuel and food or for cash advances, you could be developing an unsustainable amount of credit card debt.
Credit cards can be one of the more expensive ways to borrow, especially if your outstanding balances aren’t immediately cleared. By paying for them with your plastic, you’re adding them to your overall credit card debt – which often has a high rate of interest attached. Everyday items, like food, fuel or bills, should be budgeted for accordingly and come out of your monthly income.
If you are using a credit card for a cash advance, there are usually even higher interest rates for this. Some as much as 30 or 40 per cent! Lenders make this type of transaction an expensive way to borrow money as a deterrent, as they recognise that it is one of the first signs that someone is overstretching themselves. Credit cards can be a great tool if used correctly, but if you’re using them in the ways listed above then it’s time to seek some impartial debt advice.
3. Minimum payments
This is also linked to your store card and credit card debt, but if you are only making the minimum monthly repayment on these balances they could take many years until they are cleared.
If you had £2000 on a credit card, with an interest rate of 16% APR (which is around the average rate for a prime customer) and only repaid the minimum each month (for this example let’s say it’s 2% minimum), it will take you almost 30 years until it’s cleared!! Plus you’ll have paid a massive £3,029 interest in the process!!
If you don’t clear your credit card balance each month, then it’s better to try and repay as much as you can to reduce the amount outstanding. Whatever you do, don’t only pay the minimum. It’s much better to set up a standing order for a set amount of how much you can afford. If you’re struggling with your credit card debts and can’t even make the minimum repayments, then you will need to seek some debt advice sooner rather than later.
4. Overstretched finances
Are you spending more than 25% of your wages to repay your unsecured balances – i.e. overdrafts, personal loans, credit cards, store cards, catalogues etc?
If so, according to the Department for Trade and Industry (DTI) white paper, you are classed as being “overstretched”. This means that you are at risk of developing severe debt problems if your circumstances change (like through redundancy, illness or reduced income) and you are unable to meet your commitments.
5. Late or missed payments
If you are in arrears on any of your credit commitments or domestic bills, it shows that you have been unable to maintain your agreed repayments. This will be logged on your credit history, which could affect you ability to obtain a loan or mortgage in the future. If this has happened to you, make sure you contact the person that you owe money to immediately and explain the reasons behind the missed or late payment. Whatever you do, don’t just ignore the problem and hope that it will go away – it won’t, and it could land you in serious trouble, which could mean bankruptcy or court action. If you have persistent difficulty in maintaining your credit commitments, you may need to seek debt or IVA advice to ensure that you can avoid court action from being sought against you.
If you have four or more separate credit commitments, the DTI suggest that you may be at risk of becoming over-indebted – as you have many lines of credit open to run-up huge credit card debts. If you have an old credit card or store card that you aren’t using anymore, it’s best to cancel it and return it to your lender – as this shows that you’re aware you don’t need the facility anymore and that you are being sensible and responsible with your finances. If you apply for a loan or mortgage and you still have many lines of credit open it can affect the lender’s decision, as they may see that you are at a higher risk of developing debt problems.