Image by Orin Zebest, San Francisco, USA
It can be difficult to know when you've crossed a line from being in debt to having a debt problem. Ask yourself these questions:
- Can you only afford the minimum due on your credit card each month?
- Do you struggle each month to find the money for living costs? (rent, mortgage, utilities, council tax, etc.)
- Do you have more money going out of your bank account than coming in?
If the answer to any of these is yes, then you may have a debt problem, but don't panic, there are steps you can take to get out of debt.
Increasing Your Income
- Make sure you are receiving to all the tax benefits and discounts you are entitled to. If you have a low income, a high rent or council tax band, or have children, you might be paying more than you need to.
- Take on some extra hours of work or a part-time second job even if it is only temporary, it could help dig you out of your hole, and give you less time to spend!
Decreasing Your Expenditure
- Look at online comparison sites to make sure you are getting the best deals on things like your mortgage, all types of insurance, and utilities.
- Use Money Dashboard personal finance software to work out where you are spending money, and identify areas where you overspend. Is it clothing? Coffee shops? The pub?
- Read the Money Dashboard blog to learn how to save money on all sorts of things. If you follow us on Twitter or Facebook, we'll keep you up-to-date with the latest tips and suggestions.
The Consolidation Solution
If you have tried all of the above, and you are still struggling with debt, there is another solution. A debt consolidation involves borrowing a new loan to pay off all your existing debts, with a lower monthly payment than how much you are paying now. While the new monthly amount will be more manageable, you will be paying it off for longer, and you will have to pay out much more in the long run.
Consolidation is useful if your repayments are coming in too fast for you to handle, but it is not a cure-all for debt problems. It is effectively borrowing your way out of debt, and if mis-managed, you could end up losing your home, or find yourself with an even worse debt problem.
That's why consolidation should be accompanied by strict budgeting and lifestyle-changing spending cuts. You will have to pay off future credit card bills on-time and in full, and always put aside enough income to cover your monthly repayment.
If you are considering consolidation, it's better to act soon rather than let your debt grow even more, but be careful. Ask lots of questions of your provider, read the small print, and make sure you are fully aware of what is expected of you.