How to deal with debt
Coping with debt
It's Debt Awareness Week in the UK from 20-26th March 2023 and this year's campaign, run by debt advice service StepChange, focuses on how debt can happen to anyone.
If you're living with debt, the feeling can be utterly overwhelming. What starts off as a small problem can quickly feel insurmountable and can lead to serious mental health issues. As much as half of all UK adults with a debt problem also live with poor mental health, ranging from consistent anxiety and low mood to a diagnosed mental health condition.
There are many misconceptions about debt, such as that it's always the result of living an excessive lifestyle or being careless with credit cards, but the reality is that it's often down to much more everyday and unavoidable circumstances. In fact, unemployment and redundancy are the most common triggers for debt problems.
This national Debt Awareness Week, Richard Lane, Director of External Affairs at StepChange, says: “One of the most common misconceptions about debt is that it only affects people on a low income, but we know this isn’t the case – debt can happen to anyone, and this is only amplified by the effects of the cost of living crisis."
With money worries still at the forefront of many minds across the country, this January marked one of StepChange's busiest periods since the Covid-19 pandemic. More and more people are seeking advice who have never had to before.
How to get help with debt
To tackle some of the most common questions around debt, we asked chartered financial planner Nicola Crosbie to share the advice she gives her clients. Scroll down to read her words of wisdom and discover the resources out there that can help you if you're struggling with debt.
Q. How do I find out what debts I owe?
"The quickest way to understand your debt position is to request your credit report. This is data that is held electronically detailing your current position in relation to debts and should you want to secure credit. Companies like Equifax, Experian, Checkmyfile, Credit Karma, Clearscore, and TransUnion all offer free access.* My recommendation is to pay for a full report or do a 30-day free trial to download the full report. This will detail current balances, lenders, payment history and any unpaid debts. It gives you a solid grounding to understand your current position."
Q. Which debt problems should I deal with first?
"Debt is not a bad thing, if it is manageable and affordable. It can facilitate great things like owning your own property. But if you struggle on a day-to-day basis to cover the costs, it can quickly become unmanageable. Some debts are much more expensive than others, such as pay day loans, buy-now-pay-later schemes like Klarna or PayPal credit, credit cards and personal loans. They all offer a solution to short-term issues but come at a greater cost, which is rising as we move to a higher interest environment. As they tend to be on a variable basis, it also means your costs could rise. What was once affordable may suddenly be out of your budget. It is sensible to focus on repaying higher interest debt options first. It will minimise the impact of rising interest and reduce expensive methods of finance. You may feel helpless when dealing with problem debt, but a sensible first step for many is to move your credit card debt onto a 0% balance transfer card - this way, you can get a temporary break from interest rates to allow you to focus on the initial payments. Just be aware that some transfer fees can be up to 3%."
Q. I'm stressed about debt. What should I do?
"Money worries can really take their toll on your health and wellbeing. It is better to confront your problem than remain in denial. Debts will get worse if no action is taken. Try to take advice at an early stage. Talk to someone about it, in confidence. A problem shared is a problem halved. Look after yourself through exercise, sleep and keeping to routine. Remember, it is only money and there is support out there to help you. Worry can really impact your mental health, so act."
Q. Which debt relief schemes can help me?
"Always remember there is help if things do become unmanageable. Things to consider:
Debt Management Plans: You agree a budget and secure payment arrangements which are affordable to you. Providers will liaise with all your lenders on your behalf and secure revised terms for repayment. You can read more about Debt Management Plans on the GOV.UK site here.
You can also make contact with your lenders directly and discuss the problems you are having, coming to your own arrangements with them. Communication and honesty are essential.
Individual Voluntary Arrangements (IVAs) are a legal and formal agreement for revised payment terms approved by the courts. Interest is suspended and it stops companies contacting you directly. A monthly payment is made but you must contact the IVA provider if your circumstances change in any way, for the better or worse, in relation to your income/savings. There is more information about IVAs on the GOV.UK site here.
Administration Orders are like IVAs but for two or more lower-level debts up to £5,000. Similar terms and payment arrangements are agreed in a formal legally binding arrangement. Read more about Administration Orders on the GOV.UK site here.
Bankruptcy is an option as a worst-case scenario. You essentially declare you cannot pay your debts, and that you owe more than the value of anything you own. Think carefully around this as any assets you have, including your house, can be used towards debt repayment. You can find out more about bankruptcy and the process of declaring it on the GOV.UK site here.
Always remember that any arrangements will impact your ability to secure new credit and generally impact you for six years following the end of any arrangement."
Q. What would your number one tip be for anyone struggling with debt?
"You are not alone, particularly during this cost of living crisis. Many people are struggling to match income and outgoings. Debt is also a temporary situation and with help you can get out of it. It may feel helpless at the time, but by acting and taking control of your own circumstances, you can make positive changes."
*The three biggest credit reference agencies in the UK are Equifax, Experian and TransUnion.
