For most people, borrowing is a useful tool to help them deal with the unexpected: they have it under control and pay off what they owe in plenty of time. However, for others, borrowing has become a problem. A recent survey revealed that one in three people worry about what they owe - and more than one in ten say they worry about it all the time. Debt leaves half of these people unable to sleep, and a third say their relationships are under extreme strain because of it.
If debt has started to worry you, there are five steps you need to take to help you get back on top of your borrowing.
NatWest says there are certain signs that sensible borrowing may have become a debt problem. These include:
- You spend more than you earn
- You're struggling to pay your mortgage or rent, utility bills and the minimum payments on your credit or store cards
- You have several cards that are all maxed out
- You can't manage day-to-day without borrowing money on your credit card
- You can't keep up with your bills, or can't make payments on loans and cards
- You're being contacted about unpaid bills and missed payments
- You're worrying about how you'll manage to pay back what you owe and your debts feel like a huge burden
1. Find out exactly where you stand
One of the first signs that your debts are getting out of control is that you can't face opening statements, because you're not entirely sure what you're going to find (and you suspect it can only bad news). Over time, the unopened post starts to pile up, and bills and statements give way to reminders and warnings.
To get back on top of your financial situation you need to open all of it. Find out exactly where you stand, what you owe and to whom, when the payments are due, and what the consequences are of missing these deadlines. You now know exactly how high a mountain you have to climb.
2. Work out how much you can afford to pay off
This means drawing up a monthly budget. You'll need statements for the last few months to hand, then use a budgeting tool like the one offered by NatWest. You need to input all your income and outgoings and it will show you whether you earn more than you spend, and if so, how much you have left over with which to repay your debts.
In many cases it's going to reveal an overspend, so you need to go through each section of the budget and ask yourself whether you can cut the costs. Some of this is relatively painless, such as switching utilities, insurance providers, mobile phone contracts or media packages in order to get a cheaper option. Some is marginally more painful and involves looking at lifestyle changes you need to make - such as spending less on going out or on clothes or little luxuries. In some cases this will help you carve out enough cash with which to make repayments.
If this isn't the case, you need to look at income and whether you are entitled to any benefits, or whether you can earn more by working longer hours or taking another job. Finally, if you're still coming up short, you need to look at serious lifestyle changes, such as whether you need to give up your car or move somewhere cheaper.
3. Allocate your payments
It's essential to get on top of your borrowing, and missing any payments will have consequences. However, you need to prioritise those debts where the consequences for missing payments are the most dire. This includes the mortgage, because your home may be at risk if you miss payments. If you are in debt over bills you also need to address this, because if you let these bills get out of hand you could end up having your utilities disconnected.
After that, you should allocate your payments so you meet at least the minimums on everything, but that you pay off your most expensive debts first. Look at the interest rates on all your borrowing, and work to pay down the most expensive. The good news is that once you have made inroads into the expensive debt, your interest payments will come down too.
4. Get in touch with the organisations you owe money to
If you cannot catch up with all your repayments and get back in control quickly, you need to get in touch with all the organisations you owe money to and explain your situation.
In most instances they will want to run through your budget with you, and examine your circumstances. However, it's in their interests to take payment from you when you can afford it - instead of writing the whole debt off - so make a clear and realistic proposal for when you will be able to pay the debt off. In some instances you will be able to arrange for them to freeze the interest on your debts until you have paid in full.
5. Get help
If the idea of any of this seems daunting, you can get hep from a debt charity like Citizens Advice or StepChange. They can work with you on your budget, and help you through the complexities of claiming benefits. They can also call the providers for you and explain how much you are able to repay and when - and ask for the interest to be frozen. This is known as setting up a debt repayment plan.
If you have gone through all of this process and can still not work out any way you will ever be able to make your repayments, a debt charity will be able to help you understand the options left to you. These include things like an IVA or bankruptcy. Both are very serious and have implications for the rest of your financial life, but if you have to take either approach, it's worth doing it sooner rather than later, so you can put your debt problems behind you and move on.