Where to start?

Sunday 16th November, 2008 - £7,408.16 in debt…

Just over six months ago, I chose to work myself into an early grave and pay off my debts once and for all. But I do realise that I’m in a very fortunate position, and not everyone who’s got themselves into a similar mess can just work harder and find a solution. So, what could I have done instead?

There are a few tried and tested methods of debt repayment, or writing off debts, so I thought I’d explain them here for those with a similar debt problem and no easy way out.

Bankruptcy

You can be made voluntarily or involuntarily bankrupt if you can’t pay your debts. There’s a good guide to bankruptcy here, but essentially it means that your debts are written off but you lose control of your assets (house, car etc), which will be shared out among your creditors to pay off what you owe. If you’re declared bankrupt, you’ll be unable to obtain credit for more than £250 without special permission, and your credit rating will be negatively affected for years. A first bankruptcy order normally lasts one year.

IVA

This is an Individual Voluntary Arrangement, and it’s seen as a step below bankruptcy. If you can afford to pay off any of your debt, it’s certainly a better option: it allows you to haggle with your lenders until you can come to an agreement over what you can afford to pay and what the lender can afford to write off. The Citizens’ Advice Bureau will offer impartial advice on how to contact your lenders and what to say to get the best results, and there’s an article that explains the whole process here.

Consolidation

Yes, why not consolidate your debts into one easy monthly payment? Along with ‘Bang! And the dirt is gone!’, those must be the most grating words in advertising. But would it be worth the hassle? Well, it’s just a matter of comparing the loans around and reducing your monthly payment - not just consolidating it. If you can find a loan that saves you some money in interest, go for it. If not, is it really that difficult to set up four standing orders instead of one? Use a good loans comparison service to find out whether you could save money this way.

I referred to my own two-year battle (which continues to be hard work) as the easy way out because it is. Even if you think that destroying your credit rating with a bankruptcy or IVA won’t be a problem, there’s no telling what the next few years will bring and what you’ll need good credit for. And a consolidation loan from an unscrupulous or expensive lender could be more trouble than it’s worth, so these methods should never be looked upon as a quick fix: just a last resort.

  Best of friends?

Monday 20th October, 2008 - £7,899.83 in debt…

You might have noticed that I recently took a week off for seemingly no reason whatsoever. Well, there was a reason and I can’t put off mentioning it any longer, as it affects my finances: my boyfriend and I have split up, and I had to give myself a week to stumble around in a daze.

Because we’d been together for nearly six years and shared a house, there’s a lot to sort out (thankfully, although it wasn’t a mutual decision, it’s amicable so we’re still talking). Obviously I’m not going to go into personal details here but, financially speaking, this is the situation:

     1.     I’m staying with my parents at the moment. It would be nice if something good came out of this situation, so I’m hoping to stay here for a couple of months with very few expenses and hopefully get rid of the £1000 Capital One card balance and more, saving me lots of interest in the long run.

     2.    I’m giving the cats a trial run at living with me, my parents and my parents’ dog. If that works out, I’ll be covering all the cats’ expenses myself from now on, but they’re worth it.

     3.    When I contact my bank, lenders and the electoral roll to change my address, my credit rating will be negatively affected, but there’s nothing I can do about that.

     4.    There will be two sets of moving costs - getting everything to where I’m staying now, and getting it all to my new house or flat when I find one - but I might be able to find somewhere with cheaper rent and bills than my previous house (and I’ll get to drive a van). When I find somewhere to live, I’ll be using MoveMe to make the process easier.

     5.    I’ve given up my temping job. After taking so much time off recently, and having to have a further week off after saying I could work from home, I felt that I was letting people down.

     6.    Most of what I earn can now be used to pay off my debts, but I’m not earning much yet: a mixture of shock and sadness is keeping me from concentrating, and being self-employed means I can’t just stare at a monitor in an office and get paid for it. I enjoy being busy and independent, I enjoy my job more than anyone else I know, I’m determined to pay my way and I’m completely committed to paying off my debts, but I’m sure anyone who’s been through what I’m going through now will agree: when someone breaks your heart, suddenly money just isn’t important any more.

A Cuddly Toy

Tuesday 12th August, 2008 - £8,228.83 in debt…

I know I’m only three months into paying off my debt, but I can’t help thinking about things I’d like to spend my money on. It’s getting increasingly difficult to stop myself from getting more credit and buying a new car, a house, a holiday, maybe a nice 42″ TV… a cuddly toy?

Anyway, I’m not going to do that - I’m going to pay off my debts before I make any major purchases. Yes I am. But what happens if I pay everything off and my credit rating is still inexplicably poor? The credit crunch could make it very difficult for me to grab a mortgage, so I’d best get working on my credit score now.

The Money Saving Expert site has just launched a new credit scoring tool. This will tell you, at no cost, how much of a risk you are to credit companies. It will ask you ten easy questions, and you won’t even have to have any paperwork handy.

Neither borrowers nor credit reference agencies just have a ‘credit rating’ that applies for you across the board. The term is ‘credit score’ and it simply compares you against a mythical ideal borrower. It depends on factors that can be worked on or changed, and there is no such thing as ‘credit blacklisting’. There’s more information on credit scoring in this article.

Using the Money Saving Expert tool is quick and easy, and it allows you to consider how your score could be improved. For instance, it asked me how long I’d been living in my current house for - less than a year, one to three years, or over three years - suggesting that, once I’ve been here another year (it’s currently two years), my score will magically improve.

It also asked me how many credit cards I have, regardless of whether I use them. It emphasised that lenders get nervous about my access to credit - not just the credit I actually use - so I must remember to cancel all my credit cards as I pay them off. That was very useful to know.

Even though I’ve had no CCJs, never been bankrupt, and am on the electoral roll at my current address, a mixture of missed payments and loads of credit have made my credit score, in Martin’s eyes, “weak”. But, if I can make it to my 30th birthday according to the debt-paying-off plan, my credit score will change to “excellent”.

But that won’t happen if I forget to cancel any of my cards (as soon as I’ve paid them off), fall behind in my minimum payments (according to Martin, this could set me back years), or have a weak moment and apply for a loan on that coveted 207CC. Fingers crossed…

 Olivia Buck says ‘Hi’

Monday 1st May, 2008 – £9,499.45 in debt…

Let me introduce myself: I’ve just turned 28, I’ve been in debt for ten years, and now I’m desperate to pay it off. How did I get myself into this dungheap of a mess of a quagmire?

I’ve always been rubbish with money, and now I’m rubbish with debt. Being in the red was fine at uni - like so many students, I got used to spending money that wasn’t mine. After I graduated, I lived with my parents for two years and paid most of it off, but then I moved to London.

I’ll tell you this for nothing: Living in London is expensive. That’s the first of many shiny nuggets of wisdom you’re going to get from this blog, and I hope you appreciate it. It’s not like I was eating diamond-encrusted swans for breakfast, but an Ikea spree here and there soon adds up.

Over the last year or so, I’ve had the feeling I should be getting out of my debt-hole. My credit rating has gone past ‘high risk’ and into ‘extreme’ territory – only adrenaline junkies and the mafia would lend to me now - but mainly I want to cut up my credit cards because being in debt feels horrible.

So far, I’ve made the following efforts:

• Although I’m self-employed, I’ve got a second job as a part-time secretary. It’s almost unbearable, but it pays the rent.

• My biggest debt was on my Barclaycard at nearly 30% APR, so I’ve transferred half the balance to a Tesco card on an interest-free deal.

• After doing that, I cancelled my Barclaycard and set up a standing order to make regular payments. When I explained why I was doing this, the Barclaycard people were kind enough to drop my Standard APR by a couple of percent.

Even after that, I’ve still got credit card bills of £200 a month and those payments are covering little more than interest. I also have an overdraft limit of £3,000, which I was always straying past before I got the temping job (bad news at the time, but I might be able to claim back some bank charges – more on that later…).

So, here’s the bottom line: How much I owe.

Barclays overdraft: £3,000 (I’m always at the limit by the end of the month)

Barclaycard: £2,977.46 at 27.9% APR

Capital One card: £999.00 at 24% APR

Tesco card: £2,399.00 at 12% APR

NatWest card: £123.99 at 13% APR

That’s a total debt of £9,499.45 (plus interest), which I plan to eliminate completely by my 30th birthday at the end of April 2010. I then plan to fit Jupiter into a blender and become the first woman to unicycle across the Atlantic.

My first job is to pay off that pesky little NatWest card as quickly as possible. I currently pay off that card at £10 a month so, once it’s taken care of, I can add £10 onto my monthly Barclaycard payment.

I’m open to suggestions, so please help me out!

 I’ve got 24 months to get solvent and apart from Ebaying all my belongings and working overtime, I need to know: 

1. Can I make more money?
2. How can I save money so I can increase my card payments without feeling the pinch?
3. What have you done to pay off your debts?
4. What works and what doesn’t?

 Over the coming weeks I’ll be trying out any suggestions I’m given (apart from illegal ones) and regularly reporting back.