Assessing your situation
The best way to avoid severe debt problems is to stay on top of your situation and to seek early advice if you feel your debts are getting out of control. If you can only just afford your minimum monthly payments, you should see this as a warning.
When credit repayments take up too much of your disposable income, even a small change can mean you lose control of your finances. For example:
- Your income might drop.
- An interest rate rise might force your monthly mortgage payments up.
- You may face an unexpected cost, like replacing the fridge or repairing the car.
It's easy for manageable debt to turn into unmanageable debt, leading to a 'debt spiral' - you can't afford repayments, which means you incur charges and maybe higher interest rates, which forces monthly repayments up even further, making it harder to meet them, so you incur more charges.
The first signs of trouble can be subtle
- Taking a small overdraft to cover expenses.
- Paying one credit card with another.
- Paying your household bills late.
If any of these sound familiar, it's not too late to take action. If you spot the warning signs early on, you could keep your debts from spiralling out of control.
What do you owe
If you don't know how much you owe, you won't know if your debt is approaching dangerous levels.
1) Sit down and write down all your debts.
2) Add up your debts:
| Include: | Don't include: |
| All your non-priority debts (credit / store cards, overdrafts, unsecured loans, etc.) | The total outstanding amount on your mortgage / secured loans. |
| Any arrears you owe on your priority debts (rent / mortgage, secured loans, tax, VAT, utility bills, etc.). | Your latest priority bills (rent / mortgage, utility bills, etc.). As long as you're not in arrears, your ongoing bills count as unavoidable living expenses, like food. |
3) Compare your debts with your income:
| If the total is: | Then you: |
| Less than 3 months' take-home pay | Seem to be on top of your debt - but stay alert and watch out for signs of trouble. |
| Between 3 and 6 months' take-home pay | Should try to repay some of your debt, and should avoid taking out any more credit for now. |
| More than 6 months' take-home pay | Really need to reduce your debt, and should consider professional debt help. |
Please note:
1) This is just a short exercise designed to give you a rough idea. It's no replacement for an in-depth analysis of your finances, either on your own or with a professional debt adviser.
2) Your salary and debts are not the only factors. You also need to think about:
- how much you spend
- how easily you think you could cut back on spending
- how reliable your income is.
3) Whatever the answer, you'll save money if you pay off your debts as soon as possible - keeping your interest payments to a minimum.