Have you lived the lifestyle of your dreams but not within your means?
I wonder how many people are wishing they had not done just that as their credit card bill hits the doormat with a thud. Well it’s too late now and for some their excesses over the past couple of months have come home to roost.
Many debt-help firms cite today the 20thof January as probably the Consumer’s darkest day of the year. Just prior to this most credit card providers would have sent out their bills and for those that, shall we say, may have over indulged a little in the run up to Christmas, they will not hold good news
According to Credit Action, consumers make around 21.9m plastic card purchase transactions every day with a total value of £1.05bn. Another startling figure is that the proportion of credit card balances bearing interest was 73.6% in July 2009.
For some people opening the bill there will be a reality check but for many there will also be a feeling of desperation as they know they will be unable to clear the balance. Okay, pay the minimum repayment you say. But just read on to see how long it takes to clear a credit card bill of £2,000 at an interest rate of 17.2% and a minimum payment of £29. A whopping 26 years and 2 months according to the ‘thisismoney’ calculator!
Others will just continue to borrow on other cards or move their balances to a 0% provider and rack up still further debt. Some will plunge further into their overdrafts until they finally show the white flag and surrender.
Will a 0% credit card balance transfer solve my debt problems?
Not necessarily and I would urge you to heed this warning. Once you move balances from an old credit card lender to a new credit card provider in an attempt to sort out your debt and you again get into trouble, then the new lender may not support you if you later decide to propose an Individual Voluntary Arrangement,( IVA) or Debt Management Plan, (DMP).
The reason for this is simple; as they have only just advanced the money as a new lender they require payment as per their agreed terms. Had you sought professional advice with your debts before moving to the new 0% balance transfer then the chances of your credit card company supporting any debt option would be much greater.
Without knowing the full picture it is plainly irresponsible for anyone to suggest, ‘move your credit card balance to a 0% lender to solve your debt problems’. You have been warned!
Okay, I don’t need help with my debts, I just need to move my existing balance to a better deal. What’s the problem with that?
Could be a good move but I have another warning about why you must make that first payment on the balance transfer deal.
You need to set up a direct debit with the credit card company to pay at least the minimum amount in time to make your first payment. If they delay it, and it is in their interest to do so, and it does not get paid then you will be charged the £12 late payment fee as well as the balance transfer fee, for example 3% on £6,000 is £180!
You could also find that the special introductory offer has been withdrawn. This happened a few months ago to one of my clients and it cost him just over £1,600 in additional interest payments. Not all credit card companies operate in this way but to avoid this happening and for peace of mind, consider making the first payment manually, in plenty of time.
Help, I know I am in trouble, where do I start?
I have detailed below your DIY guide on how to build a report on your financial standing. There are 5 important steps you need to take first;
1 Find out what you owe and to whom
Establish exactly how much you owe and to whom in unsecured borrowing:, that is credit cards, loans and bank overdrafts, making separate lists of those in your name only, your partner's name only if applicable, and those in joint names, if applicable.
2 Establish what loans are secured
This is a mortgage, a loan on a property and hire purchase agreements. Also identify other priority creditors, utilities, council tax. Remember, if you do not pay secured creditors you may lose the security and if you don't pay priority creditors such as gas and electric you may lose the services they provide. Make this list separate to your unsecured creditors.
3 Disposable income
This is the amount you have available to pay your unsecured creditors / lenders after you have paid the secured ones in full and to find this figure you will need to complete an income and expenditure form. Apart from establishing the actual amount of spare income to pay creditors, this form will clearly illustrate in no uncertain terms where your money is going every month. In my view this form will often indicate what your options are when you deal with your creditors / lenders.
4 Assets
Now work out what assets you own. This can be a house with the difference between the mortgage and the house value known as the equity. However, if the home is jointly owned then the other named person may well be entitled to half the equity. For example, if your home is jointly mortgaged with your partner for £80,000 and is valued around £140,000, then there is equity of £60,000, which, divided between you would be £30,000 each.
5 Communication
Are you a WON'T PAYER or a CAN'T PAYER?
If you fail to make your payments to your creditors / lenders and do not communicate with them you will be regarded as a won't payer and leave the creditors no other option but to take legal action against you to recover their losses.
You need to contact your lenders who will then ask you to provide the information detailed above before they make a decision on how to help you. The information generated from points 1 – 4 above is often referred to as "a statement of affairs" or “statement of means”. Information provided under ‘Assets’ is vitally important because it may present other options such as a re-mortgage. You will need to think this through carefully and also consider your partner's position.
When contacting your creditors, always try to write to them rather than telephoning so that there is a written record of your actions.
- Keep copies of your letters, some local shops and libraries have photocopying facilities
- If you do use the telephone, keep a record of what was said, to whom and when.
- Remember, you should pay your priority creditors first before offering payment to your unsecured liabilities.
- If you do not have surplus income at this stage, write and request that creditors suspend any further action and freeze interest on your liabilities for a period such as 3 months, after which it can be reviewed.
Where can I go to get help?
We have a list of organisations that can help you free of charge, which can be found at Debtwizard guide to helpful organisations.
All you really need to do is think carefully when using your credit card in the future and ask yourself, ‘do I need it?’, ‘can I afford to buy it?’ and ‘how am I going to pay for it?’ That should slow you down a bit and for some it will get you back in control of your finances.
For some however it is a race to reach their credit limit and for those who do not ask themselves these questions then I daresay I may be speaking with you over the forthcoming year when we discuss the possibility of bankruptcy!
