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Dealing with bad credit because of debt
Many people have debts that don’t affect their credit rating badly, because they are able to make regular repayments. In fact, borrowing can actually allow people to build up a credit history in the first place. It shows potential borrowers that they can handle taking on – and repaying – debt.
However, if you have debts and have missed repayments, defaulted on a loan, received a CCJ, changed your original debt repayment agreement, become insolvent, or faced legal proceedings because of debt – you could have a credit rating that’s been quite seriously affected, depending on the exact circumstances.
With a bad credit history, it can be difficult to borrow money, or even to open a bank account.
Dealing with debt and bad credit
You could still open a basic bank account with a bad credit history as your credit history needn’t be a barrier. Also, there is no overdraft with these accounts, so you won’t be borrowing more money through them, which can help you to get back in control of your finances if you’re used to borrowing beyond your means.
Also, a basic bank account will allow you to make Direct Debit (and perhaps standing order) payments. Your debt repayments and other bills would leave your bank account automatically every month, which can making budgeting simpler.
Working out a budget
You can begin budgeting by working out your monthly expenditure – what you earn/receive minus the essential costs, bills and unsecured debt repayments (credit cards, store cards, personal loans, utilities, etc). Whatever is left over is what you have to live on. To help you stay within your budget, you could begin reducing your spending and/or cutting back on luxuries.
If your unsecured debt repayments plus your essential bills add up to more than your income – there may be ways to reduce your unsecured debt repayments. A Debt Management Plan, an insolvency solution, or another debt solution might be suitable.
Dealing with bad credit
If you’ve reduced your debt payments (from your original agreement), or missed payments, this can be reflected in your credit rating. However, you can improve your credit rating over the long term by making consistent and regular payments.
If you have a bad credit score, it’s likely you won’t be able to borrow money at a good rate, or even borrow any money at all. One option is to avoid potentially expensive borrowing for some time, and focus on making debt payments to reduce your debts and improve your credit score.
If you did apply for more credit, you could be creating problems for the future – as well as potentially damaging your credit rating if you get turned down for credit a number of times in a short period.
Lenders tend to be more likely to approve applications if you live at the same address for a number of years and if you stay in the same employment and don’t ‘job-hop.’ Equifax, Experian and Callcredit are three credit reference agencies that could provide you with further information
IVA or bankruptcy?
If you are having trouble meeting your debt repayments you should always seriously consider an IVA (Individual Voluntary Arrangement) before you consider Bankruptcy. IVAs are by far the lesser of two evils.
With an IVA an Insolvency Practitioner will negotiate with your creditors a realistic repayment plan. They will be fair to both parties on this and not negotiate a repayment you can’t afford. They may also negotiate a reduction in the total amount of the debt you repay.
However, if you are made, or make your self bankrupt then you will still have to pay your creditors a certain amount. This will be decided by the Official Receiver, who is the person that will oversee your bankruptcy. The Official Receiver will go through your personal accounts, look at what money you have coming in and what you have going out in the way of necessary expenses, and any left over will be used to pay off your debts.
In addition to this, you will certainly lose your house if you own it or it is currently mortgaged. If there is equity in your house, that is it can be sold for more than you owe on your mortgage, it will be sold. Your mortgage will be paid off and the surplus will be used to pay off your debts. If there is no equity in your house the mortgage company will repossess it, as bankruptcy is a legal declaration of you not being able to pay your debts.
Other luxury items you own may also be sold to pay your debts. The Official Receiver won’t take your bed or cooker, but if you have an expensive item, such as a large plasma screen TV, they make take it and sell it. They may also take your car too, even if you need the car to get to work they may decide that it is too expensive and you could get to work with a cheaper one. In this case your car will be sold and you will have to buy a cheaper one and the difference will go towards paying your debts.
So you should always consider an IVA first, but in either case you should always seek professional advice before taking either course of action.
Good debt or bad debt?
As long as credit is easy to receive, debt will continue to walk with us through life, taunting our every move and aggravating our very existence.
Some debt advisors state that the total amount of debt accrued per month in credit cards, loans, mail order catalogs etc., should not exceed any more than 36% of our gross monthly incomes. This is the maximum target level a mortgage lender will allow while assessing a potential borrower.
What is the best next step to take?
The secret to using debt to your advantage is to make sure that you buy assets which will increase in value. For example, a mortgage will allow you to live in a nice home with the hope of making a profit from it in the future. A student loan will allow you to study for a good job which will bring you many financial rewards.
Instead of using credit for profitable purchases like the above, most people use their cards to purchase everyday items which decrease in value the moment that they are bought, for example, food or clothes. If you do have to revert to your credit card for these goods, you should pay your total balance in full to avoid interest charges.
A credit card should never be used to finance a holiday as a holiday does not appreciate in value. Add to this a card with a high interest rate and you are dabbling with bad debt. An ideal debt to income ratio should not rise above 20% of an annual income when calculating personal loans, credit cards, utility bills etc. Figures that rise above this mark are likely to turn creditors away, even if payments are maintained.
Tagged Credit Card, debt, Debt Advice, Loans
Alternatives to Bankruptcy
Debt Counselling – If you want a sensible alternative to bankruptcy but are unsure where to turn, you may be an excellent candidate for credit counselling. As rates of consumer debt have grown over the past decade, debt counselling services have grown along with it. The best debt relief services can help consumers to dig themselves out of the hole they find themselves in.
Informal arrangement – You could consider writing to all your creditors to see if you can reach a compromise. Include a timetable of when you will repay them.
Individual voluntary arrangement – This is a formal version of the previously described arrangement. You would need to apply to the court with the help of an authorised insolvency practitioner. He or she would supervise the arrangement and pay your creditors in line with the accepted proposals
Administration orders – If one or more of your creditors has a court judgement against you and if your total debts are £5,000 or less, the county court could make an administration order. Under the administration order, you make regular payments to the court, which will then pay your creditors. While you are paying the administration order, your creditors can’t take any further action against you to get their money, without asking the court first. Also, you will not have to pay any interest on your debts. You will have to pay a fee for an administration order, but this will be added to the money you already owe and not charged separately.
Bankruptcy And The Alternatives
If you are deeply in debt then it may be that bankruptcy appears to be the only option. There are others and below I briefly mention 3 of them. If you are thinking of bankruptcy then your local Citizens Advice Bureau can advice you of your options and who to speak to next.
IVA
An IVA is the most common way to avoid bankruptcy. If you have assets that you would otherwise lose by going into bankruptcy an IVA can offer a level of protection.
Debt Management Plans
Talk to your creditors directly. If your creditor knows that you are really struggling to meet your repayments they may well suggest a more manageable course of action. After all, if you go bankrupt they lose everything.
Re-mortgage
If you are home owner your property is under threat if you go into bankruptcy. If you are in a position where you have regular income coming in but cannot meet your financial commitments this could be a good alternative.
Debt Relief Order
These were introduced in April 2009 as a way for people with limited assets to declare personal insolvency without declaring Bankruptcy.
Five tips to save money today!
Saving money doesn’t have to involve making large sacrifices. My granny always used to say if you look after the pennies the pounds will look after themselves. Small savings of even just a pound everyday can have a great impact on your finances. Here are five tips on how to save a pound each day:
- Bring your own lunch instead of buying sandwiches. This will fatten your wallet and thin your waist. Shop sandwiches are often unhealthy and always more expensive. Try keeping an empty water bottle with you that you can fill up from the tap to avoid paying a pound for mineral water.
- If you a big coffee addict try keeping sachets of instant coffee with you at work. Microground instant coffee can be almost as nice as the real deal and certainly its cheaper than Starbucks.
- Walk or cycle to work, or into town if you are going shopping. This way you can save heaps of money from bus fares and parking machines.
- If you are a big texter try signing up to online services which offer free text messages to UK mobiles. This will save you money on texts and its much easier to write a message on a proper keyboard.
- If you need to send somebody a card, try making one. Use a funny picture from a family holiday, or draw one of your own. People will appreciate the homemade touch and you can save the money from the card to get them a better present or send it first class!
Most of the time we can save money with just a little bit of effort and if done regularly enough this can make an impact! You don’t have to stop leaving tips for the waiter in restaurants to save money on a daily basis!
Why I don’t lie about debt
I don’t lie about debt to my partner. I think that one of the main things about an honest relationship is transparency, and it is an important feature to maintain a healthy relationship.
I have seen in the past, with firsthand experience, how debt can affect families. My Dad suffered greatly with debt when he was in his mid-forties and he almost had his house reclaimed due to a mortgage he really couldn’t afford to pay off. He eventually shared his problems with the rest of us, and we were able to help him.
It increased family tensions, and I would not wish to put my family through similar circumstances which is why I think honestly is essential in any relationship.
I have, of course, had debt problems and sharing them with my partner really relieves the weight that the debt carries. If I had them bottled up I would not know how to cope.
Don’t Go Bankrupt Before Reading This!
Instead of declaring bankruptcy, how about trying these commonly used debt solutions….
1. An IVA. These were introduced by the Government as a way of debt management without resorting to the complex legal process of Bankruptcy. You negotiate a percentage with creditors of how much you can pay back, and if they agree you may end up paying significantly less than before. It’s not an easy option however, so you should seek advice.
2. Debt Consolidation. Instead of paying the huge interest and fees on separate credit, store cards and loans, these firms can give you one loan which means one payment. Although these are advertised heavily on TV, they are rarely suitable as they mean a very long term commitment.
3. Remortgaging. If you have equity in your home, remortgaging can be an easy way of getting some extra cash at a low rate. It does mean however that the length of your mortgage will increase and again, it’s not for everyone. It could be a risky option, given the ups and downs of the mortgage market.
Dreaming of being debt free? Three tips for today!
The first step is to notice that you have a problem so well down you have completed the first step and hopefully the only way is up! It will take a lot or determination and maybe even some sacrifices however it will be worth it in the end. The second step would be to stop spending. Of course there are always the essentials you need to buy but could you cut down on luxury products and nights out etc. Also it does help to cut the cards up; it means the temptation has been removed.
There are many things that you can do to get you started.
- How about looking at the interest rates on credit cards. Is it possible to switch these over to something that is 0% and stop you wasting money on just paying off the interest which can take years to clear off the balance?
- Earning more money is also a good way to chuck some extra money at the debts to get them paid off quicker. How about extra shifts, a second job or even selling unwanted items on the internet. It can be hard work but remember your aim – to be debt free. It can help setting yourself a goal and give yourself something to work towards.
- Something that is definitely worthwhile doing is drawing up a list of all your incomes and out goings. This way you can pin point areas which may need a bit of work and help to save any money which you can throw at the debt. A budget for food etc can stop any wastage. Also it is a good idea to work out which debts need the most attention, these are usually the ones with the high interest.
The flexible solution to serious debt problems?
Something I frequently read is that an IVA is more flexible than bankruptcy.
An IVA will certainly give you a degree of control over what happens in the event of serious financial difficulty.
When compared to Bankruptcy, there isn’t anywhere near the same level of intrusion into your life and financial history. You provide your practitioner with the information requested, including a breakdown of income and expenditure, so affordability can be determined. Bankruptcy results in a full and compulsory analysis of your accounts and can lead to a Bankruptcy Restriction Order (BRO). This would mean that you can be held accountable for up to 15 years in the event of unnecessary risk or fraudulent activity.
Another appealing factor for many is that you can protect your professional status of employment (lawyer, accountant, police etc) and family home within an IVA. You will still be expected to re mortgage at the end of year 4, but only if this is affordable and sufficient equity exists.
Your IVA will not be advertised in the local press so nobody will be made aware, although it will be recorded on the insolvency register. There are also new debt solutions such as the Debt Relief Order (DRO) released in April 2009 which could be an option for you. But of course, it will largely depend on your financial situation as to what debt solution is best for you.