Managing debt
Step 1: Debt explained
When we talk about debt we usually mean money that we owe to
others.
There are a lot of different ways to borrow money. For example,
we may borrow from friends or family or from banks, building
societies and other organisations. Regardless of where we borrow
from, until the money is paid back, we are in debt.
When debt becomes a problem
Most of us need to borrow money at some point in our lives,
often to pay for expensive things like a home or a car or for
education. As long as we pay the money back when we should, this
sort of debt is quite normal. But if we cannot or will not pay back
the money we owe then debt can quite quickly become a problem. And
the longer we ignore the problem, the bigger it tends to get and
the more trouble we find ourselves in.
Why debts grow
We usually have to pay interest when we borrow money and this is
what makes our debts grow. As well as paying back the money we
first borrowed, we also have to pay interest on the money we
borrowed. If we do not start paying back our debts, or we do not
pay back enough at a time, our debts will keep growing. We have a
section on interest that explains this further. See Interest.
Step 2: Recognising that your debts have become a problem
A lot of us ignore or miss the signs that tell
us that our debts are getting out of hand, perhaps because we are
not ready to face up to the situation or because we have never
actually worked out exactly how much money we owe. But if we cannot
keep up with the repayments we need to make, are leaving bills
unpaid or borrowing even more money to keep afloat, it is probably
time to sit down and take stock.
The Money Advice Service website has a
debt test to help us think about our own circumstances (link opens
in a new window).
Step 3: Tackling debt
To tackle debt, you need to put together a thorough plan of
action.
- First of all, sit down and make a list of all your debts so you
know exactly how much you owe.
- Next, if you do not already have one, work out a budget for
yourself. This will show you how much money you have coming in and
how much you are spending. It will also help you work out whether
you have any spare money to help pay off your debts. See Budgeting.
The consequences for failing to pay some debts are greater than
others so the next step is to prioritise your debts. For example,
mortgages, other loans secured against your home or rent are at the
top of the list because, if you do not pay them, you could end up
homeless. Council Tax is also high up on the list. The Money
Advice Service website has
more information on prioritising debts (link opens in a new
window).
- The companies and people we owe money to want to get their
money back so they are often willing to negotiate over how money is
paid back. What you need to do is contact everyone you owe money to
and negotiate with them. As this can be daunting, it is a good idea
to get help from an expert, for example your local Citizens Advice
or National Debtline. They can also help explain your options
if you cannot pay back your debts.
- There are plenty of fee charging debt management companies
offering advice and debt management plans. These companies can be
motivated by making money and not always by offering the best
solution. That's why you should always get debt help from a free,
impartial, expert source. This includes national debt charity, the
Consumer Credit
Counselling Service (CCCS) (link opens in a new
window) which has produced a guide to
Debt Management Plans (link opens in a new window) to help
people in debt understand more about the options available to
them.
Step 4: Would you like to know more?
Last updated: 25 January 2012
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