Get appropriate advice

Although we have produced these notes you should be aware that financial advisers are generally not debt counsellors and most are not skilled at helping people in financial difficulty to regain control of their finances.  We are no exception.  Not only that, but typical hourly fees charged by financial advisers are £120 to £200 an hour.  There is little point, therefore, in having a series of meetings with a firm of financial advisers to get yourself out of debt! 

Where you simply want a one-off meeting to check your options then by all means talk to us.  If the situation is such that it is likely to take some time to resolve, we recommend that you make use of the excellent free services of the Citizens Advice Bureau. 

They will help you set up your plan of action, and can work it through with you each step of the way, if necessary.

Having put the basic plan together, possibly with the help of the Citizens Advice Bureau, you may need specific financial advice concerning a re-mortgage or further advance, or an investment product, or replacement of an expensive protection product.  That is where you should involve our particular expertise.

So now to a plan of action that you can start working on straight away.

Prepare a budget

Do you know how much you spend each month on everything from utilities like water, gas and electricity to newspapers and magazines?  The first step to re-organising your finances is to prepare a budget.  Find out what you are spending and where.  Take a pen and paper, or use an Excel spreadsheet if you are familiar with such things, and write it all down.  

It is not important to think of everything at the outset because you can add other items as you go along.  The important thing is to start your list.

Having started to list your outgoings you then need to list your income.  This is not just your income from your employment or self-employment, but any pension benefits you are receiving, any State benefits and any investment income. 

There is an online calculator available from the Financial Services Authority website to help you with this. 

Once you have both expenditure and income totalled up, you can see just what money you have and where it is going. 

List everything you owe

List all your debts and all your credit agreements.  Include what you’re paying each month and the interest rates being charged.  If the interest rate is at an introductory rate, note when that rate ends and the higher rate kicks in.  It is vital that you gather all this information together.  

It is estimated that as many as four in every five people who owe money on credit cards, loans, overdrafts and mortgages don’t know what the interest rates are. 

Prioritise your debts

Now that you have everything listed, you can work out which debt you plan to clear first.  If you have limited money, then it makes sense to pay off the debt that has the highest interest rate.  This may be an overdraft, or a credit card, or store card.  Whichever one has the highest interest rate is the one that you should attempt to clear first. 

If you have a number of credit cards you should use a practice that has become referred to as ‘snowballing’. This describes the practice of concentrating your spare money on your most expensive card whilst maintaining the minimum payments on the rest. 

You pay as much as you can afford each month off the most expensive card and get it cleared as quickly as possible.  Once that one is paid off you move on to the next most expensive. 

If you keep up the momentum, this will make a noticeable reduction in your debt as the amount you are paying off your target credit card snowballs month after month.

Use savings to pay off expensive debt

The Annual Percentage Rate (APR) of interest charged by credit cards at the time of writing varies between 9.9% and 15.9%.  The average APR of store cards is much higher and at the time of writing is 24.4%.  At the time of writing the Bank Base Rate is 5.75% and this is huge cost for the use of credit.   Worse still, any money that you have on deposit is likely to be earning at best around 5.0% after tax. 

So why pile up massive interest charges while you earn so much less on your savings account?  Why not let your savings really work for you, by using it to pay off some of that costly debt.  Look at the following:

Using your savings to reduce your credit charges exposes your money to no risk and it is as easy as paying money from one account to another.

Review existing savings plans

You may have an endowment plan that was taken out for an earlier mortgage and which is no longer being used to repay your existing mortgage.  If this is the case you might be able to use it to repay some of your debt, but you should not doing anything in respect of such plans without seeking our advice. 

Many endowments were set up on an equity-linked basis and if these are no longer needed to repay a mortgage there may be no advantage in keeping them going to maturity and the value can be used to reduce your debt.  In many cases you would get a better return by investing your monthly premiums in an equity-linked fund as part of an ISA.  Be aware, however, that you will also be giving up valuable life assurance cover. 

If the underlying fund is With Profits, any early encashment would be wasting a possible terminal bonus at the maturity of the plan and there may be a Market Value Reduction to reduce the real value of the fund.  We encourage all our clients to keep With Profit Endowments going to maturity if at all possible. 

Where your need to reduce your debt now overrides any possible future benefit we would be happy to investigate selling your endowment plan and you might receive 10% to 20% more than the surrender value at no cost to yourself.  We would also discuss with you whether you need to replace the life assurance cover being provided by the endowment or change your mortgage from an interest-only to a repayment basis. 

Review existing protection plans

You may not be aware that whilst you are struggling to make your personal finances balance, you could reduce your outgoings on various insurance products without reducing the protection that they give you.  It is amazing how many people do not bother to shop around when renewing their car insurance or household insurance. 

A good insurance broker will not normally charge for this service and if you know what you are looking for you can use the internet to do a lot of the searching for you. 

Even if you have not yet got ‘on-line’ you will find that your local library has and they will make a very small charge to let you use their computer to search the internet.  If you have no experience with computers choose a time when they are not busy and many libraries will have a member of staff who will be pleased to show you how easy it is.

Where life assurance and health insurance plans are on a term insurance basis (ie there is no savings element), we encourage our clients to review them every few years as good savings can often be made.  We can tell you if you are able to save money and will be pleased to set up the new plan for you.  The only thing we ask is that you do not cancel your existing cover until the new plan is in force.

Review existing pension plans

If you are 50 or over and have one or more personal pension plans you may have the option of taking a tax-free cash sum now.  This is not the right course of action in every case because it could mess up your financial security when you eventually retire.  However, for some people this option can provide a lifeline in a difficult situation and where they have time to build up further pension benefits in future. 

The problem with obtaining cash from your pension fund is that you also have to start taking the pension income.  There are, however, two recent changes in pensions’ legislation that have improved the situation. 

•   For those who have a pension fund of around £200,000 or more, the introduction of pension drawdown plans enables you to take a flexible level of income rather than the fixed amount available under an annuity.  This flexibility can enable you to take a much lower amount of pension while you are still working and increase the amount once you actually retire. 
•   For those with more modest pension funds, the introduction of stakeholder pension plans, with their low costs, can enable you to reinvest the pension that you do not wish to receive at that time back into a pension fund for your later life.
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Minimum payments = maximum expense

Over the last few years the minimum payments on credit cards and store cards have dropped from the standard of 5% to the 2% mark.  There is a simple reason for this.  Lenders can extract even more interest from you.  Why?  Because so many people only ever make the minimum payments.

Let us look at the sums.  If the interest rate you’re charged is 1.5% per month and you make the minimum payment of 2%, how much have you actually paid off the debt?  Just one half of one per cent (ie 0.5%). 

At this rate it will take some people 42 years to pay off their credit card debt!  The secret of getting out of credit card debt is to pay more than the minimum payment and to pay as much as you can, as soon as you can.

Switch to lower rates

Most people who discover that they are getting into financial difficulties will not be able to sort out their problem within the next few months.  What this means is that you should shop around for a lower interest charge on any debt that you have.  If you are using credit cards, then it means you will probably have to ‘Rate Surf’, at least for a period. Rate surfing is the practice of moving to a credit card with a low introductory rate or no interest charge at all for, say, two months and then moving on to another introductory rate or no interest charge period and so on. 

This is not something that you will want to do for very long but it could be helpful at a time when your indebtedness is most acute.  It is particularly important to be aware that the practice may give you a poor credit score when applying to certain lenders for a mortgage or remortgage.  If you are going to do this you need to give it your active attention and make notes of when each special introductory rate expires.  Then ensure that you have either paid the debt off in full, or transferred it somewhere else, before the normal very high interest rate starts. 

According to Consumer group Which?, borrowers could save nearly £5.3 million a day if they moved outstanding balances on their plastic to cards offering more competitive rates. Whatever approach you take, reducing the APR by 10% on a £5,000 debt is still saving you £250 over six months.  That’s £250 that would have gone in interest charges but instead is £250 of debt repaid. 

Once you make that balance transfer you should destroy your old card.  There is no need for it to be readily accessible so that you can then build up new debt.

Consider a re-mortgage or further advance

With current variable mortgage rates of around 7.75% the solution for many people will be to transfer any debt onto their mortgage.  If you are not currently locked into a mortgage that has high redemption penalties and you do not have an adverse credit history, you are likely to be able to make noticeable reductions in your mortgage interest payments for the next year or two. 

If you find the right mortgage you will not be charged any fees or even legal fees in many cases and there will be no redemption penalties beyond the end of the special reduced rate.

If your existing lender is going to charge you a high redemption penalty because you are locked into a fixed rate, for example, it may still make sense to move to a new lender, depending on the savings involved. 

Where the redemption penalty is such that it is unlikely to be recovered you should talk to your existing lender about the possibility of a further advance in order to move some, or all, of your debt from a high interest charge to a lower mortgage interest rate.

Some do’s and don’ts

•   Do resist the latest ‘must have’ product that your neighbours, friends and colleagues all seem to have.  Many of those whom you might wish to emulate are really just building up debt that they will not all be able to repay.
•   Do make sure that your direct debit payments are all scheduled to leave your account around 7 to 10 days after your salary is paid into it.  That will get all your bills out of the way before you get a chance to spend the money on other things.
•   Do consider getting a second job for a short period.  You may not feel like working three nights a week after a hard day’s work but it will mean that your debts are cleared more quickly.
•   Do think about taking a lodger. Under the Government's Rent-a-Room scheme, you are allowed to receive rent of £4,250 a year without paying tax on the income.  You will need to agree this with your mortgage lender as well as your insurance company, but it can prove to be an effective, easy and temporary solution to immediate financial problems.
•   Do use a car boot sale.  It takes effort but they can be quite fun and it's a good way of getting rid of some of the clutter that you have accumulated over the years.  There is no need to be selective about the quality of stuff you sell - some people will buy anything.  After all, you did!
•   Do make sure you that, if you frequent the same supermarket for your food and petrol, that you collect your points whenever you buy anything.  Over a period of a year, the loyalty points on your weekly shop can amount to enough to fund your entire food and drink requirements for Christmas!
•   Don’t be tempted to go to a debt counselling company that charges a fee for their services.  Your money would be far better used paying off the debts and the Citizen's Advice Bureau offers the same service for free.
•   Don’t be tempted by offers of loans from companies on the back of national newspapers or the television.  The interest rates are usually astronomical.
•   Don’t go shopping without a list of what you actually need and don't miss out on the regular buy-one-get-one-free, or three-for-two offers on your regular purchases.
•   Don’t neglect the bargains to be found in charity shops when it comes to buying clothes.  If you live in a wealthy party of the country, you will often find top brand named items that have been discarded by someone who wore them just a few times and you can purchase for a tenth of their new price.
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In conclusion

Debt is defined by the Oxford dictionary as ‘being under obligation to pay something’.  When we as individuals use our plastic to run up debts which we cannot pay immediately, then we place ourselves under future pressure.

Getting out of financial difficulty is possible if you keep a cool head and determine to do something about your situation.  You certainly cannot do anything until you have worked out where your income is going.  By immediately stopping any unnecessary expense you can start to take the pressure out of the situation.  Having worked out your debts you should reduce them by using your savings and by moving those that remain to lower interest rate products where possible.

Finally, once your financial situation starts to ease you should start putting money aside to act as a buffer for the next time your finances come under pressure.  We would be pleased to recommend the right type of investment plan for you.

Personal Advice

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 Help with debt

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