How to manage and reduce your debt | Money

TThe number of people with money worries has skyrocketed over the past 12 months, according to debt relief agency StepChange. His research found that 45% of UK adults have struggled to keep up with household bills and loan repayments in recent months, up from 30% a year ago and 15% in March 2020. So if debt is becoming a problem for you, what can to do about it?

Recognize the problem

Another research by StepChange found that 55% of its clients had waited more than a year before seeking help with their debt. Sue Anderson, spokeswoman for StepChange, says: “Many people have waited and suffered in silence. They try to use other coping mechanisms before contacting us.”

There are different reasons for delays – but stigma is still a real problem. Research from the Financial Conduct Authority (FCA) shows that 42% of people who had financial problems and had ignored attempts by their lenders to come forward about missed payments had done so out of shame.

Misconceptions about how people get into problem debt persist — and many people who get into trouble worry that others think the problem is the result of poor money management. In fact, StepChange says the vast majority of its clients have found themselves in financial trouble as a result of a life change that has resulted in a sudden drop in their income: layoff, death or illness, of course, can all have serious repercussions – and more recently, rising energy , food and fuel bills got people into trouble.

Whatever the reason, Anderson says, “As soon as you realize you might be in trouble, you should act.”

Make your priorities clear

Identify your priority debts (where the consequences of defaulting on them can be very serious, such as rent or mortgage arrears, utility bills, council taxes, and fines) and make sure you address those first.

“Every business out there understands the current economic climate and is committed to doing whatever it takes to help customers,” said James Jones, director of consumer affairs at credit bureau Experian. “First and foremost, it is important to talk to relevant creditors or service providers.”

The cost-of-living crisis has brought about a shift into the areas of debt that cause the greatest stress. Citizens Advice says that prior to the pandemic, tax arrears were the most common form of debt, followed by loan, store and credit card debt. Now energy debt is the biggest concern. Contacting organizations you owe money to can mean you can negotiate a cheaper way to catch up on late payments.

Your energy supplier has a responsibility to help you find a solution – but if you don’t come forward and try to negotiate, you could be threatened with having your service stopped.

If you’re having trouble paying credit card debt, the card issuer may agree to give you a break from repayments or pay a reduced rate.

If you’re having trouble paying a mortgage, the lender may offer a number of options, including a pause in payments, a temporary reduction in monthly repayments, or adding your missed payments to your mortgage principal.

Different creditors may propose different solutions – and the options depend on your own circumstances and the magnitude of the problem.

seek debt advice

Debt advice is an FCA regulated service and reputable advice services are an extremely useful way to get help improving a difficult situation. StepChange, National Debtline, Christians Against Poverty and PayPlan all offer impartial, non-judgmental advice and have guided thousands of people through the debt maze.

The consultants start with a complete analysis of all your financial obligations, expenses and income. “This budgeting is helpful for any household, whether it’s in debt or not,” says Anderson. “It gives you a really good picture of what’s happening with your money, so you have the opportunity to look at that and tweak it and make it work for you.”

There is no set management process – the next steps depend on your situation. “If you’re a little concerned that things might get out of hand, then maybe you need to work out your budget and give you some tips on how to manage things,” says Anderson. “Or we may need to discuss a selection of specific debt solutions that we believe may be appropriate for your circumstances.”

There are a number of options. A debt management plan is an informal agreement between a borrower and lender that allows you to organize repayments on your non-priority debt (including credit cards and loans, but not things like mortgages or rent) in a way that you can afford.

An Individual Voluntary Arrangement (IVA) is a legally binding agreement that binds you to a long-term plan. Others include debt forgiveness and bankruptcies. Each has its own tangle of specifics, pros and cons, and an advisor will help you unravel them and see which option, if any, suits you.

Choose a reputable service

Beware of commercial debt management companies that try to profit from those with debt problems. “The worst culprits are the predatory lead generators and bankruptcy providers,” says Anderson. “There are many of these online with very similar names to the real counseling services.

“They may not go through the same type of process that we would go through, which is this very thorough process of looking at the client’s circumstances, what might serve them best from the full range of solutions, and stating their interests in the.” center,” says Anderson. “The fact is, there are certain debt solutions that are more lucrative for a counselor to set up, but aren’t for everyone.”

The IVA is a special hotspot, says Anderson. These must be set up by a bankruptcy trustee (who charges a fee), but you don’t need a debt management company acting as a paid intermediary. An IVA, says Citizens Advice, is “an expensive option and a long-term commitment.” Some people may like it, but it won’t suit everyone; A reputable counseling service will tell you if there is a better solution for your situation.

Trying to hide the problem won’t help your credit score

The FCA’s research showed that two in five people (40%) experiencing financial difficulties believed (wrongly) that speaking to a debt counselor would have a negative impact on their credit file. “That’s one factor that doesn’t help,” Anderson says. “People feel that taking action to manage their debt could hurt their creditworthiness, but that’s not the case.”

Conversations with debt counseling agencies will not appear on your credit report, although any debt solutions you have taken will show up for six years. But then also payment defaults. “Your checking and credit card providers, all your auto loans, a mortgage, a lot of household bills, cell phones, televisions, broadband accounts, gas, electricity, water — although they don’t all share information universally, especially many of these big-name providers do,” says Jones. “So if you’re missing payments, chances are your credit score is already on a downtrend. The sooner you find a solution that gets you ahead, the sooner your credit rating can recover.”