If you developed a strange rash that just wouldn’t go away, you’d visit your doctor – but it’s amazing how many people who listen to health warnings don’t do the same when it comes to wealth warnings.
Now more than ever, it’s crucial to monitor your debt levels to prevent a slide into the financial mire – before you’re in so deep that getting out seems almost impossible.
“Credit is a vital part of our lifestyle and our economy and we need to use it wisely, especially in this tough financial climate,” says Darryl Bowman, director of the credit monitoring service CreditExpert, “It’s important to monitor your borrowing and make sure you’re keeping on top of repayments – and the easy way to do that is to check your credit report regularly.”
Here are some warning signs that will tell you if you are getting dangerously into debt.
You don’t know where the money goes
You should have enough to get by comfortably but somehow you always seem to run short by the end of the month. It’s time to do a budget. Write down everything you spend – every last penny, including cups of tea and bus fares – for a month. Then go through your bills and add in the relevant proportion of essentials such as utilities, TV licence, insurance and car tax. Then see where you can cut back.
You make the minimum payment on your credit card each month
This costs you more money in the long run because you end up paying interest on the interest charged in previous months. If you can’t afford to pay off your balance in full each month, you should pay as much as you can – not just the minimum.
You have been turned down for credit or refused an increase on your borrowing limit
Lenders are never keen to let people who are stretched to the limit borrow even more money. They will have checked your credit report and decided that the risk you may not be able to repay what you owe them is too great. That means it’s time to cut back on spending if possible, repay what you can and investigate moving balances to lower-cost cards or loans.
You take out new borrowings to repay existing debts
You’re deluding yourself if you think this can go on – you’re actually building up more debt over time unless you use a new source of credit at a lower interest rate to repay an old one totally. Act like a lender: take a good look at your credit report so you can see exactly what you do owe, what it’s costing you and whether you can really afford any more. The chances are that this will be a wake-up call – if you wouldn’t lend yourself any more, then nobody else will want to either.
You have emptied your savings to make repayments on debts
While interest rates on savings are so low, it can make sense to use them to repay credit that’s charging a much higher rate – you save money that way. But it’s frightening to have no safety net, so see if you can rebuild a small nest egg in case of emergencies, such as a broken washing machine or a roof that needs mending.
You often post-date cheques
If you don’t have enough money in your bank account to cover your regular outgoings, you need to take action. You shouldn’t have to wait until payday each month to pay for your groceries, rent or mortgage. Look at your budget again and try to identify relatively painless ways to cut back – have friends round to dinner instead of going out, mend your shoes instead of buying new ones, swap DVDs rather than going to the cinema. Small economies can soon add up.
You sometimes skip repayments or make them late
This isn’t a harmless way to get over a temporary shortfall in funds – it will register on your credit report for at least 36 months and could make it difficult for you to borrow when you really need to. If you’re worried that you can’t manage to make a repayment on time and in full, call the lender and explain your circumstances, then offer to pay what you can afford until you have more spare cash.
Your creditors are calling you
If you’re this far behind with your repayments, you need to take drastic action. Talk to your creditors and explain your situation. You may be able to agree a new payment schedule – they would rather you paid back what you owe slowly than have the extra cost and effort of chasing you through the courts. This is the time to get free debt advice – try Citizens Advice at www. adviceguide.org.uk, National Debt Line at www.nationaldebtline.co.uk or the Consumer Credit Counselling Service at www.cccs.co.uk
You believe you can walk away from your debts
Bankruptcy or an IVA should always be a last resort as they have very serious and long-term consequences. Depending on your circumstances, you could lose your home. You may be discharged from your bankruptcy or pay off an individual voluntary arrangement but the evidence that you let lenders down will remain on your credit report for at least six years, making it hard for you to borrow even when you’re back on your feet. It can also affect your chances of getting some jobs and your ability to rent a new home, as potential employers and landlords can check your credit report if you give permission, so it’s best avoided if at all possible.
You have no idea how much you owe
Sticking your head in the sand won’t make the problem go away. Start by taking a look at your credit report, which lists your credit accounts – such as credit and store cards, loans and mortgages – and your repayment record. It will show how much you owe, to whom and whether you’re falling behind. Lenders check when you apply for credit, to see that you can afford to borrow more, so it’s wise to keep on top of it, as even a small clerical error could affect your ability to borrow. Check your Experian credit report online – it’s free with a 30-day trial of CreditExpert
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