In the UK, many people reach a point where they are unable to afford to pay debt that they have accumulated. Credit card debt can have detrimental effects on a person’s wellbeing. In these situations careful management and organisation of the existing debt is essential. This guide aims to introduce people to the possible options available to them however for free, confidential and personalised information it is strongly advised to contact debt charities and organisations.
In certain cases a simple reorganisation of the way a person’s debt is managed can reduce the amount that the individual pays the lender. This may make their debt affordable, allowing them to meet repayments without having to use other methods that have more serious negative effects on a person’s credit score. It is strongly advised for anyone who finds themselves unable to repay their debts to look at reducing their debt.
Although your main concern should be meeting the minimum repayments set out in your lending agreement, paying above this amount reduces the total value of your repayments as it will reduce the amount you pay in interest charges. Since interest charges are relatively high, paying whatever you can above your minimum repayments can save you a lot of money.
Prioritising your debts allows you to organise your repayments into the most efficient way possible. This can potentially save huge amounts in interest charges. Firstly, it is important to distinguish between priority and non-priority debt. Priority debt is not necessarily the largest amount of debt held; it is the debt that that will have the worst consequences if payments are not met. This includes debt where you can lose your home as a result of not paying the mortgage or rent, having your heating and gas cut off because you haven’t paid your fuel bill and where it possible that you will receive a court summons. Since missing payments on priority debt has the greatest personal risk it should be paid first.
After this, non-priority debts such as credit card repayments and personal loans remains. Non-priority payments with higher interest charges attached to them should be paid first. By organising non-priority debts this way debt holders will reduce the total value of interest payments that they have to pay.
For some people with a good credit history it may be possible to transfer your balance to another card that has a 0% interest rate attached to it. Many lenders offer balance transfer cards with an interest-free introductory period. This means that as long as borrowers meet the new minimum payments set by the lending institution they will not be charged interest on the transferred balance. However, if minimum payments are not met then the interest free introductory period will be invalid and a relatively high interest rate will have to be paid to the remaining debt.
Lenders usually charge a fee for this service, typically between 1.5% and 3% of the total debt. However, if it is possible to arrange a balance transfer with 0% interest it is very likely that the savings gained in interest payments will be larger then the value of the fee. For example, if you are paying 15% APR on a debt of £5,000 and transfer the balance to an interest free card you will pay a fee of £150 (charged at the 3% rate) and make an annual saving of £750.
There are risks associated with interest free balance transfer cards. It is important to bear in mind that they are not solutions to the problem; the debt must eventually be paid. It is also a good idea to write down the date the 0% interest rate period expires so that interest is not charged against the debt unnecessarily. In addition, balance transfer cards usually charge interest on debt accumulated from purchases and as they should not be used for this purpose. In addition, if you apply for several credit cards in a short period of time there is a risk of this damaging personal credit score as lenders may see this as evidence of insecurity. It is important to consider this risk before applying for a balance transfer.
If after trying all the above options it is still not possible to make your debt affordable you can try talking to your credit card company. It is possible that they will offer some lenience with your payment plan. However, before contacting the credit card company it is essential that you know how to approach the situation in the most efficient way possible.
Before contacting the lending company you should organise the relevant information. Preparing a list of all the companies you owe money to and noting down how much you owe is a sensible starting point.
After doing this, you should prioritise your debt. You should aim to pay off priority debt first, debts with the largest risks attached to them. These include debt where you can lose your home as a result of not paying the mortgage or rent, having your heating and gas cut off because you haven’t paid your fuel bill and where it possible that you will receive a court summons. After this non-priority debt, the remaining debt should be paid off in an order starting with the debt that has the highest interest cost.
Once this information is gathered you are ready to communicate with your lender. It is preferable to communicate in writing as oppose to telephone conversations so that you have proof of any arrangements you make. When telling the creditor that you are having difficulties meeting payments they may employ various strategies to help make your debt manageable. This may involve freezing outstanding charges, offering a payment holiday, agreeing to reschedule they payments you owe or the deadline that the payment is due and negotiating a repayment agreement where you can clear arrears in instalments.
If the lender is not willing to make any arrangements to make debt more affordable there is no need to be disheartened. Debt charities and organisations offer free, impartial and individual services in this area. For advice, visit moneyadviceservice on how to reduce the cost of you credit card debts