Debt Problems What to do & where to get help

Q: "So how did you build up debts of this size?"

A: "Well I planned for and budgeted, shopped around to get the cheapest borrowing in order to buy a car/conservatory/caravan and now we're repaying it."

Q: "So how did you build up debts of this size?"

A: "Well I'm not sure really, I just used my credit card and the cost built up."

The first steps... sort your spending

The following are a few ways to manage your cash and reduce your outgoings that are specifically useful for those with debt problems. If you've time, it's far better to go through the full Money Makeover guide.

Budget and reduce outgoings

If you have debt problems, then doing a budget is central. You have to get a handle on what you spend to futureproof your finances. The big problem with most budgets though, is... they don't work. To help, there's a special free budget planner which counters all the traditional budgeting problems.

Earn under £72,000? Check your benefits

Any family with income under £72,000 may be entitled to some form of benefit. You can do a quick check-up for free in just five minutes.

Can you get help paying the mortgage? Use our eligibility checker

There are a couple of government schemes specifically to help mortgage holders who are struggling to make monthly repayments. These are an extra benefit to pay the interest for you and a full rescue scheme where your local council buys some or all of your home then rents it back.

There's also information on repossession and rent arrears.

Reclaim, reclaim, reclaim

For those in debt, it's very likely some of it has been made up of charges which have unlawfully been taken from you. If you've incurred bank charges or credit card charges for going beyond your limits, you may be able to get the cash back.

The same is true of mortgage exit fees.

It's also possible you may be in one of 400,000 homes in the UK paying too much for your council tax.

If you have a loan, then it's crucial to check whether you were mis-sold the payment protection insurance, which could've cost £1,000s, to see if you can get the cash back.

Cut the costs of all your debt

Now the aim is simple. Repay the debt as quickly as possible, while being charged the lowest possible interest rate.

Check credit reference files (for free - or get PAID)

Before you start, it's worth ensuring your ability to get new cheap credit isn't being hampered by duff data on your credit files. This can cause rejections, but worse still, if you keep applying before it's corrected, even once the problem is fixed you can then be rejected because of all the applications. It's possible to check your files for free though.

Shift debts to a cheaper credit card
Suitable for: Mid to high credit scorers

Used correctly and with discipline, credit cards are the cheapest borrowing possible, especially when shifting debt to new ‘balance transfer' offers. It's possible to get long term borrowing on a credit card at under 6%. Even if you don't have a great credit score there are still attainable deals.

Cut credit card costs without new credit
Suitable for: Low-mid to high credit scorers

New credit isn't always necessary to cut credit card costs. Many credit cards allow existing customers to move other debts to them at special rates. Doing this in the correct order, following the Credit Card Shuffle technique, can create substantial savings. Using this technique in a TV money makeover, I cut one man's interest from £1,400 to £400 a year.

Check for grants and support

Some utility companies offer help if you have large arrears on your gas, electricity or water bills. You'll need to be a customer of the company, so if yours is not listed contact it to see if it has a similar scheme.

Get a cheap personal loan

Standard personal loans can give you a consistent cheap debt, and for larger amounts are competitive with the cheapest credit cards. The fixed repayments also provide structure for those who tend to let credit card debt linger.

Unfortunately, those with poor credit scores won't usually get decent rates. An alternative is to look at joining a credit union. For many they’re a welcome alternative to payday loans or doorstep lending.

Credit unions are independently-run local co-operatives which aim to assist people who may not have access to financial products and services elsewhere. There are 500 in the UK providing loans, savings and current accounts, each deciding its own services and rules on who can join.

Always use savings to repay debt

The interest paid on savings is usually far less than interest charged on borrowing, so paying off debts with any savings is a serious boon.

The reason I've put this after the main debt switching steps is that you should first try and cut the cost of your debts where you can. Then use what savings you have to pay off as much as you can - but focusing on the remaining high interest rate debts.

Thinking "surely I need my emergency cash fund"? Actually, that's old-fashioned logic. Read the guide linked below for a full explanation of why.

Danger credit card minimum repayments

The amount you repay on cards is also crucial. Minimum repayments are designed to keep you locked in for years. Make only the minimum on a standard high street card with £3,000 on it, and it'll take you 27 years to repay and cost you almost £4,000. Yet it's easy to turn this around, even if you can't afford to pay more.

Remortgage: shift debts to a cheap deal
Suitable for: Low-mid to high credit scorers

It's worth stating that a mortgage is just a loan secured on your home. If you can't pay it back, the lender can take your house. It's due to this additional security that it can offer a cheap rate over the long term.

With the credit crunch, it's not as easy to get a cheap deal as it used to be. Yet it's worth working HARD to find one. For every 1% you can drop the rate per £100,000 of mortgage debt, you save £80 a month. So it's important to squeeze every last fraction lower.

An obvious idea is to shift credit card and other loan debts onto your mortgage if it's cheaper. On the surface this looks like a no-brainer. The debt is cheap, and as it's over a long time the amount you pay each month will be lower.

But it's not quite that simple. Technically you are shifting unsecured debt to secured debt, so there's an increased risk of losing your home if you can't repay. Plus it may increase your life assurance and other associated mortgage costs. And it may not actually be cheaper. Paying off over a longer period means you end up paying more interest, eg 5% over 20 years is actually much more expensive than 10% over five years.

Don't be totally put off though, if the other routes above haven't worked. It's still worth considering and doing the numbers, especially if you've a flexible mortgage so you can pay the debts off more quickly.

Dealing with problem debts

If you can't cut the cost of the debts, or if after doing that you're still struggling, it's time to consider some more severe measures.

Talk to your lender

It's very important to get on top of debts as soon as possible. Don't default or miss payments. Let your lender know if you’re going to be unable to pay; it's always better to talk to them. Of course, preventative measures such as reducing interest, expenditure, and being a smart consumer are the best form of action.

Can you get help from the government?

There are a few ways which may be able to provide you with interest-free borrowing rather than getting any commercial debt.

Local council support schemes: From April 2013 each local authority is responsible for providing help to its residents struggling with an emergency, such as you or your families’ health being at risk, not being able to afford to buy food, needing help to stay in your own home and coming out of care, hospital or prison.

Sadly this is a postcode lottery, each council can choose whether to offer financial help or not or who is eligible. For example, some may give furniture or food grants while others may give cash. Contact your local council or just Google "www.yourarea.gov.uk" to find out its procedure.

Budgeting loans and advances: This is a government scheme providing interest free loans to those on certain income-based benefits if you need essential items for your home or other things that you cannot pay for in a lump sum, such as clothes and furnishings.

Apply for one via the Jobcentre or via the form on Gov.uk (if you're in Northern Ireland, use NIdirect). If you have means to get money any other way (using savings, for example), you won't qualify. Up to £1,500 can be borrowed at one time for each loan and repayments are dependent on what you can afford to pay.

Sadly, demand is extremely high at the moment and there isn't a bottomless pot of money. If the Job Centre decides your circumstances aren't urgent or you're not struggling, you may not get anything. But if you think you qualify and really need the cash, it's definitely worth a shot.

If you weren't able to get get this help check to see if there are other grants available in the Low Income Grants guide.

Have you been rate-jacked?

Many card providers have written to their customers saying their APRs will increase by up to 10%. This is the growing phenomena of 'rate-jacking'. Under-publicised rules can be deployed to stop rate-jackers in their tracks - these include an absolute right to reject rate rises for existing debts. If you've had a letter you have several options on how to fight back.

Carefully check secured loans
Suitable for: Very poor to poor credit scorers, but be careful

Secured or 'consolidation' loans are something to beware of. We've campaigned against many elements of them, and they can be dangerous. They are, at best, a loan of last resort and if you fail to repay it you can lose your home. Plus, unlike personal loans, the rate is variable, so it may sound cheap at the start, but soon they can push it up.

However, in a few, very limited circumstances, they're a good solution. If you've got expensive debts and some (not too substantial) credit history problems, you may be able to cut their interest rate this way.

Sale and rent back
Suitable for: Very poor to poor credit scorers, but be careful

This is where you sell your house to a company, but then are allowed to continue living there paying rent. It seems an attractive option for some but it's nowhere near as good as it sounds for many people.

You could only get 50% of your home's value, the rental agreement mightn't be secure and there's even a risk that the person you sell the house to may have it repossessed themselves. Consider with care.

Is an IVA or DRO right for you?

If you’ve seen the adverts on TV, you’d be forgiven for thinking that an Individual Voluntary Arrangement (IVA) is the answer to all debt worries. The promise of a scheme that can write off 75-90% of your debt is not to be taken lightly.

An IVA is a serious financial arrangement and is only suitable for a small number of people. If you are in debt crisis, read the guide to find out if it could be the right thing for you. It's also worth talking it through with one of the debt counselling agencies.

Since April 2009, a new type of insolvency (of which IVAs and bankrupcy are another) called a Debt Relief Order (DRO), has been available. It's specifically aimed at those with debts of less than £15,000 who do not own a house (or have any other assets, such as savings).

To get a DRO you need to go via an approved intermediary, such as StepChange Debt Charity (formerly CCCS) or many Citizens Advice bureaux. See their contact details in the free debt counselling section.

Free debt counselling

If you've exhausted all the options above, check the not-for-profit Money A & E website for further ideas. If things are no better, even if you're not in debt crisis, at this point it's worth talking to one of the debt counselling agencies below.

The right people to go to...

The aim is to find non-profit debt counselling help. In other words, a one-on-one session with someone paid to help you, not to make money out of you. Be careful not to confuse this with ‘free help’: many commercial companies say they’re free as you’re not charged directly, but you’ll still pay somehow.

Stop debt collectors harrassing you for 30 days

These non-profit agencies are also the ideal people to go to if you're being harassed and bullied for payments by debt collection agencies.

An agreement between the Government and Credit Services Association, the body that represents debt collecting agents (see its Code of Practice), gives new power that guarantees debt collectors won't contact you for at least 30 days, provided you've sought debt help or, since July 2011, can show you are trying to repay your debts using a self-help tool.

The debt counselling service will inform collectors, who'll then give you a month's breathing space to get yourself on a better footing.

The places we'd suggest contacting are:

What they do to help

These counsellors use a variety of techniques, such as:

• Negotiating with creditors to freeze your interest.
• Placing you on a debt management plan (DMP) where they negotiate with your creditors (see some stats on DMPs from StepChange Debt Charity).
• Point you towards an IVA (Individual Voluntary Arrangement), Debt Relief Order or even bankruptcy (not as scary as it sounds).

They will certainly show you how to prioritise the most important debts to enable you to keep food on the table and a roof over your head.

I know many people are nervous about going, and imagine it'll be like being in the headteacher's office at school, but they're not judgmental. They're not there to tell you off, just to help you sort out the problem. Talking to them may help you sleep at night.

Unfortunately the counselling services can be oversubscribed. If it takes time to get an appointment with them, use the info on their websites to start to plan.

The wrong people to go to...

Avoid any debt help or loan consolidation companies that advertise on the telly or in some newspapers. Their job is to make money out of you, plain and simple. While in the short term their plans will make your payments lower, in the long run it'll cost you dear. Avoid them. Don't touch them. Don’t go near them.

This post from the forum explains it better than we ever could:

"We, my wife and I, are on a seven-year plan with StepChange Debt Charity" [formerly the CCCS, one of my suggested agencies – Martin] "having recently changed from a commercial debt management company after hearing Martin on Radio 2's Jeremy Vine show. The simple action of swapping to StepChange Debt Charity has shaved over two years off the length of our plan as the money we were paying the management company now goes to our creditors instead! Of course, that also means a financial saving of nearly eight grand over the term of the original plan's 10 year period."

This includes IVAs and debt-wiping companies. While they sound good, they're only for a few people. If either is for you, the debt counselling agencies should suggest it.