Lenders and credit card companies are in agreement: you need to take action.The best thing to do is talk to them about your finances and see what they can do to help.
Some banks are more sympathetic than others. Take mortgages as an example. In the UK it’s some of the “sub prime” lenders that have a reputation for being aggressive with mortgage arrears. However we are told by brokers ‘in the know’ that at least one of the top five mortgage lenders in the UK is very aggressive at pursuing arrears and will start repossession proceedings after the second missed payment.
But not all lenders are the same.
The Royal Bank of Scotland is on record as saying it would always encourage customers who are experiencing any financial difficulty to contact them as soon as possible so they can provide the appropriate assistance. What’s more if a Royal Bank of Scotland customer has debts elsewhere, and they are unable to cope, the bank will suggest they get in touch with (free) money advice organisations such as the Citizens Advice Bureau, Advice UK and National Debt Line. This kind of attitude is not untypical.
As of March 2006 it became easier to analyse all your finances as major banks began sharing all customer data - loans, credit cards, mortgages and current accounts - with the three biggest credit-checking agencies in the UK, Experian, Equifax and Callcredit.
So in theory its much easier to sit down with a debt adviser, to see where the biggest problems lie.
You can order a copy of your credit report online at www.experian.co.uk for £2 or with any of the other main credit-checking agencies.
Beware of third party debt consolidators
Debt consolidators are companies who advertise heavily and promise to clear your debts through consolidation loans BUT these can come with high costs. These companies charge high fees to arrange a consolidation loan. These are often loans secured on your property with higher than average interest rates.
Remortgaging might be a better solution
Remortgaging can release some equity in your property to pay off debts. If you clear your credit card debts in this way you could be paying interest of 5 to 6 per cent rather than 20 per cent.
But this option isn’t open to everyone. And there is also a risk of falling into the UKs £35 billion "never-ending mortgage" trap by failing to stick to or reduce the term of your loans. This is now resulting in pensioners retiring with mountains of debt. The smart choice – if its open to you when remortgaging - is keep the total term the same, or better, reduce it and save a fortune on interest payments.
The message is - face up to the situation and talk to creditors about it as early as possible as they will often be more sympathetic and helpful than you think.
Ten steps to get out of debt
If at any stage you need help, contact an organisation well recognised for its debt counselling expertise such as the National Debtline, your local Citizens' Advice Bureau (CAB), Advice-UK, Payplan or the Consumer Credit Counselling Service and keep talking to lenders and other creditors.
To get out of debt you need to become thoroughly familiar with your expenditure and income and how the two compare. Many people have no real idea where their money goes. Many don't even read bank statements or credit card bills. How much unopened mail do you have?
To To help yourself get out of debt don’t take the ostrich route. Try not to panic and don't ignore the problem. It won't go away. Even after repossession, mortgage shortfalls can be pursued for 12 years!
Something to avoid if you want to get out of debt without paying through the nose clearing your debts. Stay clear of third party agencies making promises to solve all your debt problems. If the promise sounds too good to be true – it will be.
Its tempting we know, but don't be tempted to get out of debt by taking out any further credit - you'll only get yourself in worse trouble.
And you'll need to get to grips with your debts to get out of debt. Obvious isn't it? So, pull together all the documents you have relating to your debts and make a list of:
all the companies you owe money to
how much you owe to each one, and
the source of debt
Take account of all your commitments even if you are up to date with some – such as fuel bills.
People who get out of debt prioritise, prioritise. This is so important we have to say it twice!
Prioritise your most important debts. You need to agree repayments on these debts first before tackling your credit card debts. By important we mean the ones where the creditor’s actions can have a drastic impact on your life. No one wants to be facing repossession, have their gas or electricity cut off or face imprisonment for unpaid council tax or child support.
Next comes getting a handle on your income. To get out of debt you'll need to calculate your total income.
You may be able to increase your income by checking you are paying the right amount of tax or claiming the correct benefits. Seek advice from your local CAB if you would like them to check whether you are receiving all you are entitled to. Or take some form of part time job (there are more work from home options than you might think).
Knowing your total income is only half the story. Getting out of debt means having your essential expenditure at your fingertips. Don't include any repayments on your credit debts, but include the normal payments on your important debts.
Now the painful bit.To get out of debt you may have to cut down on your expenditure So, take a hard look at your expenditure - see if there is any way you can cut down. Don't underestimate the amount you spend on essentials like food and fuel especially during the winter. Find out whether you can spread payments for fuel and water bills using budget schemes.
Going forwards you'll be spending what you have without taking out extra borrowing. No more spending on the never, never. So the next important step to get out of debt is subtracting your expenditure from your income. If you have any money left over, this can be split between your creditors. If you don't have any money left over, contact one of the organisations listed above such as CAB for advice about what you should do next.
Finally negotiate repayments on your most important debts, then split any remaining money between your credit debts. For example, CAB advisers do this by working out repayments according to how much you owe each creditor. It might be easier than you think to get out of debt step by step. Many debts can be paid off in small increments over a long period of time.
There is no doubt. People who successfully get out of debt take back control of their lives rather than letting the state of their finances over-whelm them.