If you've been pushed even deeper into the red by Christmas and the new year, now is the time to act. We explain how to identify and tackle your debt problems.
Even before taking into account the extra financial pressure of the recent festive season, many Brits are struggling to cope with debt.
Research published by the charity StepChange in the run-up to Christmas found that almost 2.5 million people are currently struggling with “severe problem debt”.
StepChange said that one of the biggest challenges at present was the fact that many people were in “less secure” forms of work, such as self-employment or on zero-hours contracts, and more susceptible to sudden falls in income.
But the added expense normally associated with the Christmas and new year period is another significant factor in increasing debt levels at this time of year.
So how can you identify debt issues before they become unmanageable? And what is the best strategy to deal with any credit problems you face?
1. Look for the warning signs
If you have a credit card or a bank account with an overdraft facility, borrowing extra money can be all too easy. But there are a number of signs that could indicate you are storing up problems for the future, according to StepChange.
Regularly incurring overdraft charges.
Using credit to pay essential bills such as energy, rent or a mortgage.
Using credit to pay off existing debts.
Relying on credit to make it through to payday.
If any of these statements applies to you, now could be the time to act.
2. Put yourself in the picture
Burying your head in the sand isn’t going to help when it comes to sorting out your finances.
Now is the time to work out what you owe on every type of credit – don’t forget to include any festive spending that will appear on January’s statements.
As well as outstanding balances, find out what interest rate applies to each type of debt as well as whether any penalty charges could be imposed.
3. Tackle expensive debt first
Understanding interest and penalty charges means you know which type of debt needs to be dealt with first.
If you’re being hit with a £5 daily fee for being overdrawn, for example, you’d be better off sorting out your bank balance than trying to clear your (much cheaper) student loan.
Equally, if you have a credit card charging 20% annual interest, this should be tackled before you start overpaying on your mortgage, say.
4. Get into the right habits
Discipline is important when it comes to dealing with debt.
A good way to impose such discipline on yourself is by setting up a direct debit to pay off a decent chunk of your credit card bill at the start of each month.
Most credit card firms only require borrowers to pay off a minimum amount every month – typically 2% or 3% of the total balance.
But paying off so little means that interest charges build up and it will take an age to clear the total debt.
5. Consolidate if you can
Moving high-interest debt to an interest-free credit card or cheaper personal loan can slash the size of your monthly repayments.
But if you have a damaged credit record, you might not be accepted for the best deals.
You can check your credit score before you apply with any of the major credit-reference agencies (a copy of your basic credit report costs £2), while new provider Noddle offers free online access to your report.
6. Find out where you can cut back
Regardless of what debt issues you face, it can be very helpful to draw up some form of monthly budget showing what money you have coming in and how much goes out on bills, credit repayment and other spending.
An imbalance can be a sign that financial difficulties could be around the corner. But your budget can also help you identify areas where you could cut back, giving you more money for essentials or to reduce debts more quickly.