It is much, much too easy to get credit as a young adult, at a time when you’re still really learning the value of money, and what it means. When you’ve got a weekend job during uni, and you’re able to pay your rent and buy food, but you can’t treat yourself. And you’re not quite used to budgeting yet. And a credit card application lands on your doormat, or your bank offers you a “great deal”, or it’s just far too easy to keep extending that student overdraft through your internet banking just a liiiiittle bit.
And then they’ve got you. It’s so easy that the next time you need something, you just get it on the credit card. You’ve finished uni, moved out of home and need some new furniture (but the graduate wage won’t stretch)? Credit card. Your friends want to go out for dinner but you’ve got no money? Whack it on the plastic. Worry about it later. And as long as you can meet your minimum payments, you won’t be getting threatening letters or phone calls. In fact, when you’re permanently near your credit card limit, the banks just keep increasing your limit. And so begins the downward spiral.
Sound familiar? It’s not just young’uns – the average family is £54k in debt (2014 figures). I myself was in £13k of debt. Overspending during university, overspending after university, consolidating debt into loans and still using the credit cards… “just for this little thing I reaaaaally need and it’s okay because I’ll pay it off as soon as I get paid.” (Spoiler alert: I never did.)
But! There will come a time when you’ll have your *ping* moment and realise that you can’t go on this way. For me it came when I realised that I was never going to be able to save for a house until it was gone, and that having so much debt (and a shoddy credit score) was going to harm any chance of a mortgage application. I’m fortunate in that I earned enough to pay off a fairly big chunk every month, but even if that’s not the case there are actions you can take and steps you can make to reducing it, bit by bit and becoming debt free.
Find ALL of your debt
Time to face the music. If you’ve had your head stuck firmly in the sand, now’s the time to unstick it and find out just where all that debt really is. You might have credit cards, loans and overdrafts, but do you have any money owing on old energy bills, mobile contracts or store cards you’ve since forgotten about?
Get your credit report (you can see it for free on Noddle) and check every single line. Does everything look familiar? If not, contact the company/bank in question. There’s some good advice for how to do this on the Equifax website. It’s always worth having a little search on the MoneySavingExpert forums first, though, as the people on there are full of useful advice.
Write a SOA
Now that you’ve found all of your outstanding debts, you need to find out how much you can afford to pay off. Head over to Stoozing.com and sort yourself a statement of affairs. It’s a calculator that adds up what you’re spending and where each month. Be honest: there’s no point in saying you spend less in supermarkets than you actually do, as you’ll find yourself in trouble (and probably spending back on the cards) by the end of the month. Factor in Christmas presents, dentist appointments, birthdays, etc and work out where your money is going. You might be able to cut down some costs (check out our thrifty articles for more info) and this is a good opportunity to work out your monthly budget going forward.
The calculator will give you a final amount that you have spare each month for paying off debt. You’ll need this figure for…
Snowballing your debts
Head over to WhatTheCost and fill in the Snowball Calculator. You’ll need your interest rates, debt balances and minimum repayment percentages (usually 2-5% of the balance, but check your T&Cs). Include any promotional periods, for example 0% balance transfers. Add in your debt-busting amount to the top, and click calculate.
The calculator will tell you in which order you should pay everything off so that you pay the least interest. It might seem better to pay off debts with smaller balances first to get them out of the way, but this isn’t always the case. However, if there’s not much difference in interest than it might be worth it for the little victory of paying one of them off, cancelling it and forgetting about it. High five!
If you can’t meet the minimums…
If you’ve put your statement of affairs together and you’re just not able to repay the minimums, don’t panic. YOU HAVE OPTIONS. Your first port of call should be this MoneySavingExpert article (again – seriously, they’re brilliant) on making a debt help plan. There are debt charities who can help you by contacting your creditors and arranging payment plans, or there are resources if you want to self-manage your payment plans. No money situation is unsolvable.
That said, a lot of people feel helpless in the face of mounting debt problems. If you become depressed because of your debt, please, please speak to somebody – StepChange have counsellors who can talk you through every step. There’s always a solution.
Makin’ dem overpayments
If you’re able to, always make overpayments on your debt. Only making the minimum payments usually means you pay an extortionate amount of interest; pay a fixed sum if you can and then chuck any spare pennies you’ve got towards your most pressing debt. Most loans allow overpayments, as do most mortgages (although check your T&Cs for both to make sure you won’t be charged for repaying early).
I use YNAB budgeting software and give myself a weekly budget. When I was repaying debt, if I didn’t use all of it, I paid whatever was left off one of my credit cards. Every tiny bit helps – even if it’s just a couple of quid here and there.
We’ve really only scratched the surface of debt management and there’s a whole heap of resources out there. Have a great big dive into MoneySavingExpert (yes, it really is that good) and you’ll find brilliant forums with advice for just about every debt problem you can imagine, money-saving tips, mortgage advice, cheap recipes… all sorts.
Do you have any tips for dealing with debt?
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