This is a guest post by Sara Williams, a debt adviser, who writes the Debt Camel blog, where she looks at everything to do with debt and credit ratings.
If you can manage all your monthly repayments but you want to clear your debts faster, then snowballing is the way to do this, as Elly describes here:
But what if you can’t make all these payments? Then snowballing won’t work as you don’t have any spare money to overpay one of your debts.
- 1 Borrowing to pay existing debts doesn’t work
- 2 Could lifestyle changes to get you back in the black?
- 3 Look at a payment arrangement or debt management if interest is the main cause of your problems
- 4 Would this take too long?
Borrowing to pay existing debts doesn’t work
What if you can pay all your debts but your credit card balance and/or overdraft goes up every month? Here you are effectively using one sort of credit to pay a different one.
It may not feel as though you are doing that – you may pay your car finance and your credit card bills from your bank account. But if that leaves you too short to manage, so you are buying groceries or paying utility bills using a credit card, you are really borrowing more every month to stay afloat.
This can’t go on… if you have one bad month, it’s fine. But when most months are bad, your debts are just getting worse. At some point you run out of credit and have to get another credit card or a loan, and that may well be at a higher rate of interest. This is the start of downward spiral you need to stop.
Could lifestyle changes to get you back in the black?
If you are eating out several times a week, buying clothes every weekend or spending a lot on holidays , then you know where too much of your money is going, Have a think about cutting this back to very low levels for 6 months and blitz your debts. When the debts are gone, you will be able to afford a lot more fun stuff.
But if you only dream about getting a takeaway and your only clothes spending seems to be on school uniform and kids shoes, then there isn’t anything you can sensibly cut back on.
Look at a payment arrangement or debt management if interest is the main cause of your problems
If you have cards and catalogues where most of your repayments seems to go on interest so the balances never really drop, then if you could get the interest frozen your debts would go much faster.
With a great credit record you can look at a 0% balance transfer card and shift some expensive credit card debt to that. Often though you won’t be given a big enough credit limit to make much of an impact on large debts.
So you can ask the lender for a payment arrangement on your debts. You offer a monthly payment which is less than the normal payment and also for interest and charges to be frozen.
See How does a payment arrangement work for details of how to do this and what to offer.
If you only have one or two debts, this is pretty easy. But if you have a lot, or you find the idea of talking to a creditor makes you very anxious, an alternative is to look at a debt management plan (DMP) through a recommended firm such as StepChange that doesn’t charge any fees.
A DMP is just the same as you making payments arrangements, except a firm is doing the talking to creditors bit and you pay the DMP firm one payments a month. They then divide this between your creditors.
With payment arrangements, the lenders don’t have to freeze interest, but the good news is that these days they normally do!
They do harm your credit record, but that’s inevitable if you can’t make the monthly payments. And a DMP or payment arrangements are less harmful than insolvency options are.
DMPs are also a good temporary option. If you know things will be OK when your youngest gets into full time school, or when you go go back to work after maternity leave, then a DMP can get you few a few difficult months then you can go back to making normal payments .
Would this take too long?
If you can pay so little to your debts it would take too long to clear them, you should be looking at insolvency options as well. A Debt Relief Order if you are renting may work. Or an IVA if you own a house with equity. Or bankruptcy. These all have the same bad effect on your credit record but they will give you a clean start which may be what you need.
If you go to your local Citizens Advice, they can help you look at what your DMP or insolvency options are and choose the right one. They won’t make any money from your choice so you can trust them.
Thanks Sara, for your expertise on this topic.
Pin me for later!
Other posts of hers that I have found really useful are:
If you are looking for general tips on how to minimise your outgoings so you can afford debt payments, or pay off more debt, these will be super-useful.
- How to Save More Money Each Month By Cutting Personal Spending