Debt Management

How To Manage Your Debt

If it is a problem, here are a few structured ideas on how to remedy a bad situation.

The process is broadly as follows;

1. Produce an Income/ Expenditure account to see where your money is spent. List your assets on a separate sheet.
2. Quantify your debt problem. Exactly how much do you owe and to which institutions.
3. Write to each company in turn detailing your current level of debt and enclose copies of your income/ expenditure account. Ask that they freeze your account from accruing further interest or charges, and that they write to you as soon as possible.
4. Go through your income/ expenditure account to ascertain where savings can be made. Perhaps you can increase income by working overtime? Note these new figures in parenthesis (alongside) actual figures.
5. Prioritise your debts with the highest interest rate as number 1, in descending order. Any structured debts like personal loans and mortgages at the bottom. E.g. Credit cards, personal loans, mortgage, bank overdrafts.
6. Apportion spare income from your revised income/expenditure account to repay the debts in a structured way using the same proportions of each individual debt to the total. E.g.

Credit Cards

Barclaycard 19.9% APR** £2000

M & S 15.9% APR* £1000

Goldfish 17.9% APR* £1000

MBNA 15.9% APR* £1000

Total £5000

*Rates correct as at 8 th March 2006 by telephoning each company

** Rate correct as at 8 th March 2006 as confirmed by visiting branch

If you have £50 to spare each month then a suggested repayment schedule might be;

Barclaycard £20

M & S £10

Goldfish £10

MBNA £10

Total £50

Remember;

• A company is relatively stupid if it refuses a repayment schedule as, if it refers to a debt collection agency the position for both parties (bank and individual) is worsened. If they were to go to court, the court couldn’t improve on your offer. The obvious caveat to this is that your offer must be genuine as far as affordability goes and must be adhered to once (if) accepted by the lender.
• The main restraint to being debt free is acknowledging the problem, facing up to reducing and repaying existing debts, and modifying future spending to remain within income.
• Realise that to be debt free could take a long time – perhaps years and is not easy.
• You do not need to pay for outside help. Just simply follow this structure.

As you can see from the suggested repayment table above, the rate of interest on a product follows a predictable path. For instance;

+ Barclayloan as at 8 th March 2006 is 8.9% APR although to have this product it is secured against your property. The risk to the lender is therefore significantly reduced from that of, say, an unsecured personal loan.

If there is sufficient equity in your home, that is value of the property over the outstanding balance of loans secured against it, an option might be to re-mortgage with a further advance to realise sufficient to repay all of your loans. In this case you would have to contact each lender again to ascertain an early settlement figure at some date in the near future by when your funds will be available. The drawback of this is that the increased mortgage amount must be affordable taking in to account your income and the amount you will be better off by not having to service your debts each month. You will, however, be repaying the total debts off over a longer period and you will almost certainly be paying out more overall over the whole period for the convenience of doing this. Although this might cost more overall, it can release the tension from the situation and improve your credit rating as the new arrangement will be formalised and structured. Another advantage is that there would be one payment each month to repay one debt although obviously a bigger one than your original mortgage was.

A bank overdraft is one of the cheapest forms of credit, is flexible in its repayment, and can offer advantages in paying less interest overall due to any credits reducing the overnight balance outstanding. The interest is calculated on the balance outstanding each night and then accumulated and capitalised to your account at the end of a period (usually 3 months.)

For any increased or restructured lending (re-mortgage with a further advance, or an overdraft) your credit rating must be such that the bank (lender) will allow it.

It is always profitable for banks and other institutions to lend money, as to have deposits sitting in the tills is unprofitable. These days the anathema is that we all have offers of credit posted to us and thrown at us without the institutions giving any thought to knowing their customer. But, as soon as we need credit, or w ant it, it can be very hard to obtain.

Income and Expenditure Account

Some months have 4 weeks and some have 5, therefore multiply a weekly figure by 52 and divide by 12 to arrive at the monthly equivalent.

i.e. £10 per week is £43.33 per month. That would be rounded down to £43.

(Earned) income. IN

Expenditure. OUT

Net disposable income (A – B)

Notes.

1. Income tax is 22% (basic rate) rising to 40% on earnings over about £35000 per year. That means that at basic rate tax, to have £100 in your pocket, you must have earned £128.21. A higher rate tax payer would have to earn £166.67 to have £100 cash. i.e. £100 X 100/78 = £128.21 for a higher rate tax payer that would be £100 X 100/60 = £166.67 There are other forms of income tax such as Nation Insurance Surcharge.
2. Council tax bills rise by any figure the local authority dream up, while earnings rise much slower at around 3% per year. That means that earnings don’t always keep pace with your bills. This is why there are different rates for national indices like Retail Prices Index – which is the inflation rate for a ‘basket of goods and services’, and the Average Earnings Index which is wage inflation. Historically in Britain we pay ourselves ahead of price inflation so Average Earnings Index AER is usually higher than Retail Prices Index RPI. That stands good for shop inflation but for council rates etc… price rises bear no relevance to RPI at all.
3. Inflation is currently 3.6%
4. Rent can be raised by a landlord at any time providing they give suitable notice. That could cause real hardship to folk who cannot afford a large rise from their already stressed incomes. Can you afford a tribunal.
5. These are normal household bills which are necessary costs of living. This is before you’ve bought a TV set, computer, cooker, bed, chair etc…
6. These bills are regularly occurring every month. They are due again next month and never go away.
7. How safe is your income? Are you paid if you are ill? If so, for how long? Are you in a ‘risky’ occupation? Are you both in ‘risky’ jobs?
8. Do both of you work? If so that’s good as 2 income streams are safer than one. What if the female becomes pregnant? Just when you need lots of income it can often nearly halve. That is why savings are important. Have at least enough saved to replace one income for a year. This takes time to build up.