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Don’t let debt get you down

According to recent publications from the Bank of England over the past year or so, outstanding consumer credit is reaching highs that bring to mind spending levels with borrowed money last seen prior to the 2008 recession.

Driven in part by the rising popularity of car finance schemes, it’s also come with a spike in declared insolvencies, in particular, Individual Voluntary Arrangements (IVAs). They may seem like a not too unattractive way to clear the majority of your debt without declaring actual bankruptcy, but can actually cause more difficulties in the long run.

What’s an IVA?

An IVA is a formal agreement between you and your creditors to allow you to pay a certain amount each month. They  agree to forgive a perhaps large percentage of your debts in return for a guaranteed monthly payment. It can last six years or longer and is a form of insolvency, meaning it can severely affect your credit rating and impact your chances of securing a loan, renting a property or getting a mortgage. After six years the insolvency is expunged from your record, but many firms still require several years of positive activity on your credit score in order to consider you in the future.  2016 saw a 23.2% increase in IVAs so before those in debt use this option, it is important to consider other solutions that may be more suitable.

There are many choices when trying to tackle credit card debt, such as the widely known snowballing technique, which sees those in debt focusing on the smallest debt first. The objective is to completely eliminate the first debt, while paying the minimum payments on any others. Once this has been completed, move onto the next one up and so on, until the debt becomes more manageable. If this doesn’t seem doable, there are a few other things you can do to help ease the load.

• Contact your credit card provider and try to arrange some kind of informal arrangement where they allow you to reduce your minimum payments for a period of several months to help you tackle some of your other debts. Don’t be shy about this. It is in their best interest to help you manage your debt rather than allow you to declare insolvency.

• Try to move your debt to a credit card that doesn’t charge for balance transfers and has a 0% interest period. These can be quite long in some cases.

• If you have enough money to cope with the odd unexpected bill, don’t think about saving for a rainy day or waiting until you have the money to pay a debt off in full. This may seem obvious, but many people may prefer to hold onto extra money they have in case they need it. In the meantime, they will be paying high monthly repayments where these amounts could be reduced.

• See if you might be eligible for any benefits. You may not think your financial situation means you are entitled to benefits from the government, but you won’t know until you check.

If these don’t work, there are still more options before considering an IVA or other form of insolvency. Many firms offer loans to consolidate your debts. These are often at a more favourable interest rate and, as long as you pay the monthly repayments and don’t get in more debt, you could see a dramatic change in what you owe each month.  But do not then build up even more debt. Lots of people do this but it just makes a bad problem even worse. Just don’t !

One alternative to an IVA is a Debt Management Plan (DMP). Many companies that offer IVAs also offer DMPs, which are an informal arrangement between you and your creditors where an agreed single monthly payment is proposed. Your creditors don’t have to accept this proposal but if they do it means your debts will be paid off in full after a number of years, depending on the size of your debt.

It’s easy to get overwhelmed by debt and a recent survey found that 32% of young people with debts viewed them as a ‘heavy burden’. However, advice is always available and the options are there. As they say, it’s good to talk, and only by being open and honest with your debt, can you begin to make some real progress. 

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