How to manage and reduce your debt

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The number of people with money worries has soared over the past 12 months, according to the debt charity StepChange. Its research revealed 45% of British adults had found it difficult to keep up with household bills and loan repayments in the past few months, up from 30% a year ago and 15% in March 2020. So if debt is becoming a problem for you, what can you do about it?

Recognise the problem

Another piece of research by StepChange showed 55% of its clients had waited more than a year before seeking help with their debt. Sue Anderson, spokesperson at StepChange, says: “A lot of people have waited, and suffered in silence. They try to use other coping mechanisms, before they get in touch with us.”

Reasons for delaying vary – but stigma is still a real problem. Research from the Financial Conduct Authority (FCA) shows that 42% of people who were struggling financially and had ignored attempts by their lenders to get in contact about missed payments, had done so because they felt ashamed.

As soon as you recognise that you could be in trouble, you should take actionStepChange’s Sue Anderson

Misconceptions about the ways in which people get into problem debt endure – and many people who find themselves in trouble worry that others will think the issue is a result of poor money management. In fact, StepChange says the vast majority of its clients have found themselves in financial difficulty because of a life change that has led to a sudden drop in their income: redundancy, bereavement or ill health can all, of course, have a serious impact – and more recently, soaring energy, food and fuel bills have led people into difficulty.

Whatever the reason, Anderson says: “As soon as you recognise that you could be in trouble, you should take action.”

Get your priorities straight

Identify your priority debts (where the consequences of defaulting are potentially very serious, such as rent or mortgage arrears, energy bills, council tax, and court fines) and ensure you tackle these first.

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Contact your lenders

“Every organisation out there knows the current economic landscape, and they are all determined to do what they can to help customers,” James Jones, the head of consumer affairs at the credit referencing firm Experian, says. “In the first instance, it’s important to speak to relevant creditors or service providers.”

The cost of living crisis has brought a shift in the areas of debt causing the greatest stress. Citizens Advice says that, pre-pandemic, council tax arrears was the most common form of debt , followed by credit, store and charge card debts. Now, energy debts are the biggest cause for concern. Contacting organisations to which you owe money may mean you can negotiate a more affordable way to catch up with late payments.

Your energy supplier has a responsibility to help you find a solution – but if you don’t get in touch and try to negotiate this, you could be threatened with having your service cut off.

If you are struggling to pay credit card debts, the card provider might agree to let you take a break from repayments, or to pay a reduced instalment.

For problems paying a mortgage, the lender may offer a variety of options, including taking a payment break, temporarily reducing monthly repayments, or adding your missed payments to your mortgage capital.

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

View image in fullscreenIf you are struggling to make credit card payments, the card provider might agree to let you take a break from them. Photograph: Thomas White/Reuters

Seek debt advice

Debt advice is an FCA-regulated service and reputable advice services are an extremely useful way to get help with 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.

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Advisers will begin by carrying out a full analysis of all your financial commitments, outgoings and income. “That budgeting exercise is helpful for any household, whether or not they’re in debt,” Anderson says. “It gives you a really good picture of what’s happening with your money, so that you have the opportunity to look at that and tweak it and make it work for you.”

View image in fullscreenThe lender may offer a variety of options for problems paying a mortgage.
Photograph: Julian Eales/Alamy

There is no set management process – the next stages depend on your situation. “If you’re a bit worried that things might be getting out of hand, then it might be a question of working out your budget, and giving you some tips on how to manage things,” Anderson says. “Or, it could be that we need to discuss a selection of particular debt solutions that might be suitable, in our view, for your circumstances.”

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

An individual voluntary arrangement (IVA) is a legally binding agreement which ties you in to a lon-term plan. Others include debt relief orders and bankruptcy. Each has its own tangle of particularities, pros and cons, and an adviser will help to unpick them and see which option, if any, suits you.

Choose a reputable service

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

“They are potentially not going to go through the same kind of process that we would go through, which is this very thorough one, looking at the client’s circumstances, what might serve them best out of the full range of solutions, and putting their interests at the centre,” Anderson says. “The fact is, there are certain debt solutions that are more lucrative to set up for an adviser, but they are not suitable for everyone.”

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The IVA is a particular hotspot, Anderson says. These must be set up by an insolvency practitioner (who charges a fee) but you don’t need a debt management company to act as a paid intermediary. An IVA, says Citizens Advice, is “an expensive option and a long-term commitment”. It may suit some people but it won’t suit all; a genuine advice service will tell you if there is a better solution for your situation.

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

The FCA’s research showed that two out of five people (40%) who were struggling financially believed (erroneously) that talking to a debt adviser would have a negative impact on their credit file. “It’s a factor that isn’t helpful,” Anderson says. “People feel that by taking steps to deal with their debt, they might blemish their credit record but that’s not the case.”

Conversations with debt advice services won’t appear on your credit record, although any debt solutions you take will show up for six years. But then, so will defaults on payments. “Your current account and credit card providers, any car loans, a mortgage, many household bills, mobile phones, TV, broadband accounts, gas, electricity, water – while they don’t all universally share information, many of those providers, particularly the big ones, do,” Jones says. “So if you’re missing payments, then your credit score is probably already on a downward trajectory. The sooner you find a solution that will help you move forwards, the sooner your credit score can recover.”

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