Managing debt

Get practical tips on how to take control of your money and to stay on top of your debt.

Being in debt can be daunting. If you are concerned about managing your finances, putting together an action plan can help you get out of debt now and manage your finance in the future. The steps below will help you take control or alternatively try the Stepchange Debt Remedy tool, in association with TSB for free online debt counselling tailored to your individual needs.

Take steps to deal with your debt

If you have any existing debts or your borrowing is getting out of control, there's no better time to tackle this situation than right now. With an action plan and determination, being debt-free can become a reality. Follow these steps to help deal with your debt:

List your debts

The first step is to take stock of everything. Think of it as a financial M.O.T. By writing down all your debts, large and small, you can get a clearer picture of what you owe - it's time well spent.

Prioritise your debts

Make sure you have your recent bank statements and credit card bills to hand. Make a list of all debts, writing down the interest rate you are being charged for each one. Debts such as your mortgage, and any loan secured against your home, should be prioritised and always be paid first.

Move existing debts from expensive interest rates to lower rates

Once you've worked out which debts are costing you the most, you might want to think about transferring any store cards and high-interest credit cards to lower interest credit cards or a personal loan. Just make sure you watch out for any balance transfer fees with credit cards.

Talk to your creditors

At TSB we acknowledge that some of our customers may be facing difficult times and encourage you to contact us directly and at an early stage if you are experiencing financial difficulty. We can help you do a financial analysis of your current situation and explore your options with you.

Check if you're better off saving or repaying your debts

Some people like to have some savings even when they're in debt. Check whether you're actually better off saving first or whether it's better to repay your debts.

To do this, compare the interest rate you're paying on what you owe with what you stand to make on any savings. Remember, you may pay tax on the interest you earn on savings.

Consider a personal loan

One way to approach your debts could be to put them all together in a single personal loan. Not only could doing this make your repayments more manageable by spreading them out over a longer period of time, but it could also help you stay on budget. But, remember, taking out a personal loan could mean it takes longer to pay off your debt and could cost you more in the long run. You'll also need to be sure you don't rack up any more debt while you're paying off this loan.

Set the date

There's nothing like a deadline to help keep you on track. Once you've worked out how much debt you owe, you'll have a good idea of how long it will take you to clear that debt. Set yourself a realistic deadline and commit to paying off what you owe by then.

What you need to know about credit score ratings

Credit scoring - or rating - is one way that banks, credit card companies and other lenders make decisions on whether or not to lend you money. A good credit score can help you get better rates when you apply for a loan or mortgage. Lenders then use this to determine whether they're going to lend to you and on what terms.

Many of us will need to borrow money at some point in our lives, whether to tide us over until payday or to buy a home. However, it is important to borrow sensibly and not let debts get out of control. If you over-stretch yourself and do not repay your debts on time, you will damage your credit rating.

The information used to create your credit rating comes from several sources such as public records, court records and lenders who often share credit rating information among themselves.

How to check your credit rating

Different lenders score your credit rating in different ways. So, if one lender refuses you, it doesn't necessarily mean everyone will.

Get hold of your credit file from any of the three main credit reference agencies Experian, Equifax or TransUnion, so you can correct any mistakes. For instance, if you have ever lost your wallet or had it stolen, someone may have attempted to take out credit in your name.

A credit report only costs a few pounds but is well worth it. When companies reply, they'll explain what the information means and tell you how to get it changed if you can show them that it's wrong.

And remember: being financially linked with someone with bad credit can affect your rating, too.

For more information, read our guide to  managing your credit score.

Types of borrowing

At times, it's good to have the option of borrowing money. But, it's important to find out what's right for you. Ultimately, any loan you take out will need to be repaid. However, there are different ways of borrowing, so you should find the one that suits you. As with any debt, you should only take it on if you can comfortably manage the repayments.

Credit cards

When you apply for a credit card from a bank or a shop, you're effectively taking out an unsecured loan for a certain amount of money (see the next section, Personal loans, for an explanation of an unsecured loan). This amount is your credit limit, and the lender determines how high it will be based on factors such as your credit history and how many other outstanding debts you currently have.

Credit cards can be used anywhere, while certain store cards can only be used in the shop that issued the card. Either way, these cards will charge you interest on any outstanding money you still owe at the end of every month. But, if you can't do this, then you should at least pay off the minimum amount so that your credit rating won't be damaged.

If you've reached the limit on your card, you should stop using it while you start paying the amount you owe. To make sure you don't miss a payment, set up a direct debit for at least your minimum payment each month.

If you are having problems meeting even the minimum payments on any of your credit or store cards, make sure you contact each bank or shop that issued you with a card (your creditors). Your creditors would rather you paid even a nominal amount each month toward your debt rather than have you end up not paying anything back. But, keep in mind that an agreement you negotiate with your creditors won't free you from your debt entirely - you'll still have to pay what you owe, but you may have a longer period of time in which to do it.

Personal loans

There are two types of personal loans: secured and unsecured. A secured loan such as a mortgage is attached to something you own such as a property. If you can't repay the loan, the lender has the legal right to sell your asset to get their money back. An unsecured loan such as a personal loan doesn't require you to provide security against the money you're borrowing. But, you're still legally obligated to repay the money you borrow.

With either type of loan, you borrow a fixed amount and then must pay it back, with interest, over a certain period of time (the term of the loan). You should also make sure you know about any early repayment charges or late payment fees associated with your loan.

As with credit cards, if you find you are having problems meeting your monthly loan repayments, you should contact your lender. You may be able to extend your term and reduce your monthly payments. Or, you may be able to take a 'repayment holiday', where you skip a monthly payment. Be careful when doing this, however, as you could wind up paying more toward your loan than you originally thought. You may find it better to cut back elsewhere to find money to meet your loan payment.

Bank overdraft

Your bank may offer you an overdraft facility on your current account. If you decide to use this, you'll need to agree an overdraft limit with them in advance. This authorised limit or agreed overdraft is the maximum amount you can take out, over and above what's already in your account. The amount you are overdrawn is similar to any type of borrowing and must be paid back. You may also need to pay interest on any amount you are overdrawn. And, if you go over your agreed overdraft limit, you could be charged a fee.

If you haven't agreed an overdraft on your current account and you go over the amount you have in that account, this will be considered an unauthorised overdraft. You could be charged a fee for doing this.

Still, an authorised overdraft facility can be useful if you just need some financial flexibility from time to time. But, if you find yourself overdrawn on a regular basis, you should re-visit your budget to see where you could make further cuts. And, if you haven't made a budget yet, then make sure you check out the 'Budgeting' guide for help getting started.



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