If your credit card bills and debts are getting you down it's time to make a stand - here are five easy ways to start.
Sections
Step one: Prioritise your debts
First things first: work out how much you owe. If you've got credit cards, get all of the statements out and list their balances. Now write down how much your overdraft is. And very importantly – make sure you list down the Annual Percentage Rate (APR) payable for each, too (you can find this out from your statements).
Now, have you any other borrowings that need to be included – loans from family/friends?
Once your list is complete, rank them in order with the one with the highest APR first. Reason being that as it has the highest interest rate it is the one growing the fastest. So regardless of how much this debt is, this one must be dealt with first!
Getting your priorities right
If you are struggling to meet all your bills, bear in mind that even though some debts, like your mortgage, might be cheaper than others, they are more important to stay up-to-date with.
For example, you should always prioritise meeting your mortgage payments before your credit card payments, as if you fail to keep up with your mortgage payments you are immediately risking the roof over your head.
Similarly, you can get sent to prison for non-payment of Council Tax whereas you can't for defaulting on your credit card.
Priority debts
Your mortgage and your Council Tax should always be your top priority debts, regardless of how cheap they might be and the snowballing system. Other priority debts include:
- The rent – the landlord could get a court order to evict you
- Income Tax – you could be made bankrupt
- Fuel bills – your gas or electricity could be cut off
- Phone bills – the phone could be cut off
Non-priority debt
Examples of secondary debts which you can safely snowball include:
- Unsecured loans
- Credit cards
- Hire Purchase Agreements
- Store cards
- Catalogues and other Mail Order debts
Obviously these secondary creditors can't be ignored but there's usually more flexibility to negotiate if you get into trouble. Organisations such as the Consumer Credit Counselling Service and Payplan can negotiate with your creditors on your behalf and help you to set up a debt management plan.
Note, however, that anyone to whom you owe money can make you bankrupt if you owe them more than £750 so even secondary creditors will need to be dealt with at some point!
The next step
Once you've identified which debts are your top priorities, you need to work out how much money you have left over each month to throw at these debts.
Step two: Start a spending diary
You'll need to get a good grip on how much you're spending in order to set up a budget, and the most effective way to do this is to start a spending diary.
You can do this using the free, secure MoneyTrack tool at lovemoney.com. If you register your accounts, every time you make a purchase – no matter which bank account or credit card you use – the tool will record it for you, and then allow you to categorise all your transactions so you know exactly what you're spending your money on every month. Alternatively, just make a note of everything – and we mean everything – you spend on paper.
This will give you a true picture of how much you spend – and once you see it in black and white it should help you decide what a worthwhile purchase is and where you could be saving money.
If you own an iPhone or iPod Touch, you can use the MoneyTrack app to monitor your money on the move.
Step three: Make a budget
While your spending diary is being completed you can get on with compiling your budget.
Now it's not as scary as it may seem. If you've never budgeted before, it's simply a case of working out how much income you have against how much your outgoings are. So grab your paperwork and list how much you get per month from salary, benefits and allowances, etc.
Now list your rent/mortgage, bills, council tax, childcare costs, and other outgoings. You'll need to work out a reasonable monthly allowance for food shopping, going out and miscellaneous expenses like birthday presents (your spending diary will help here).
Alternatively, using a nifty tool such as the statement of affairs calculator might help. All you need to do is enter your figures in the boxes provided to view an instant snapshot of your household budget and personal balance sheet.
Hopefully, when you subtract the outgoings from the income, you're left with some cash (if not, you need to trim some outgoings!).
And if you want to set yourself a budget, you can easily do this by using our MoneyTrack budgeting tab which allows you to set a monthly budget for any specific category (such as petrol and fuel). You can then track your progress through the month against the budget you set.
Now we go back to prioritising your debts. If you have, say £300 left over each month (after paying your priority debts, such as your mortgage or rent, and making sure the minimum payment is being made on all your credit cards) use this to start paying off the most expensive debt. Then, when that one has been cleared, throw that £300 at the next most expensive debt.
As time goes on and the debts start to clear you'll have more and more surplus money each month (as there are fewer minimum payments to be made) so this extra cash can also be thrown at the debt – leaving you with the happy knowledge that your debts are being cleared even faster!
Step four: Transfer your balance to a 0% card
Of course, while you're attacking your debts they are still growing as interest is accruing every day. It can often feel like you're moving two steps forward and one step back.
But one thing you could think about is transferring the balance of one (or maybe more) cards to a 0% card for balance transfers. This would mean it will stop accruing interest and you get valuable breathing space to save up enough money to clear (or mostly clear) that debt.
Of course, you'll need to have a pretty good credit history to be able to take out a 0% card – so before applying (and creating yet another 'footprint' on your account) apply for a copy of your credit report to see where you stand.
There are three main credit reference agencies in the UK: Experian, Equifax and CallCredit.
You can sign up for free 30-day trials of your credit report from Experian and Equifax. Just remember to cancel your membership before the 30-day trial period is up to avoid being charged in the future.
You can get lifetime access to your CallCredit credit report via its Noddle website.
Step five: Start to save
Once all of your debts are paid off you can think about saving – and provide yourself with an emergency fund so you never get in debt again. Hurrah!
So don't get used to the extra money each month – set up a Direct Debit so that hard earned dosh goes into a Cash ISA or savings account instead.
You can boost your coffers by examining your budget and thinking how you could trim your expenses a little each month. For more inspiration, have a read of How to save money every day of the week.
Once you've got into the savings habit you may want to take things a little further and start saving a little each month in separate accounts to cover different things (eg a car account for potential garage bills, a holiday account for next year's trips, a pet account if you're not keen on paying for pet insurance, etc).
Plus if you can put a little by for your car/home insurance bill you'll have enough to take out an annual policy (and save on having to pay monthly). Get into the savings habit and hopefully you'll never have to spiral into debt again.