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Guide to Managing Debt

Introduction

Most of us who have taken on a financial debt have sometimes wondered, at one point or another, whether we are getting out of our depth.

It may come about because we have borrowed too much, perhaps from too many sources, including credit cards, loans and overdrafts. Or, despite being as careful as possible, disaster strikes: illness, redundancy, family bereavement or a relationship break-up.

If you are feeling overwhelmed by debt, here are nine easy steps to follow.

1) Admit you have a problem

Many people don’t like admitting the fact that they have a problem. The signs are varied, but can include:

• “Binge” spending, particularly when depressed

• Having and using more than three or four credit cards in addition to an overdraft

• Paying only the minimum or less on credit card debts each month

• Using credit to live on

• Court summonses for various debts

• Owing money to your local council, or to HM Revenue & Customs (such as VAT payments)

2) Work out your income and expenditure

It is important both to quantify how much you owe and also to calculate how much your debts are costing you each month.

First, add up all your debts. Don’t forget to include debts to family members, plus any unpaid council tax and other bills.

Second, work out what you currently spend all your money on, down to the last detail. Include things like newspapers, coffees on the way to work, regular taxis, even one-off “treats”. In this last instance, take a few months and average the monthly cost. Use credit card and bank statements to help you.

There are some online living expense calculators that can help, including one of them is from the Financial Services Authority (the City watchdog).

3) Cut your costs

Perhaps all you need to do is cut out one or two luxuries to bring you back on target. Use the above list to work out whether that is possible.

At this stage, it may be worthwhile considering “consolidation” of your debts:

• Some credit cards offer “0 per cent” deals on balance transfers. Cut up your other credit cards once the transfer is complete

• Some loans may be cheaper than overdrafts. Look for unsecured loans, where your home is not at risk in the event of a default

• If you have equity in your home, extending your mortgage is an option. But be aware that your total interest payments may rise because you are spreading the debt over a longer period

If you are beyond this stage, perhaps because no one is prepared to offer you any more credit, move on to the next section.

4) Learn how to budget

It’s a simple process, with three key steps:

1) Is this item absolutely necessary?
2) Can you do without it?
3) If not, can you substantially reduce how much you spend on it?

More pages

Page 1: Introduction
Page 2: 5) Prepare a list of creditors
Page 3: Where to go for more help

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