People borrow on credit card because it is easy, once you have the card you can borrow money without having to fill in a form. There is also the temptation to regard the available balance on your credit card(s) as money that you have available to spend, and not consider the monthly interest costs of using it.
Credit cards are so common nowadays that it is extremely unusual to meet someone that doesn’t have at least one. If you do meet someone without a credit card it’s a bit like meeting someone that doesn’t drink – you wonder whether they are a very disciplined person or a recovering addict! Following my own debt problems I was until recently in the latter category. I have now been given a credit card (at a very high rate of interest) and this prompted me to consider why I had got into trouble with credit cards in the past. Could it all happen again?
Credit cards are of course a very useful financial tool if used correctly. They can help smooth over temporary variations in your income or expenditure and are just about essential for staying in many hotels. They are however a very expensive way to borrow money on a medium to long-term basis.
So Why do People Borrow on Credit Cards?
If you have available credit on your cards it is very hard not to think of this as money that is yours to spend. People are often helped into this way of thinking by introductory offers that give low or zero interest for a number of months. During this introductory period you can spend without incurring any monthly charges and it really does seem like free money. There is a big shock in store when the low/zero rate period ends – suddenly you will find that your monthly spending budget has been cut by the amount of interest that you have to pay. This can then start you on a debt spiral.
What is a Debt Spiral
A debt spiral starts when you need to borrow money because you don’t have sufficient money to pay for either what you need or have decided that you must have. Unless this imbalance in your income and expenditure is temporary the problem is made worse by having monthly repayments/interest. You therefore need to borrow more and more to keep the same standard of living, with the growth-rate of your debt getting faster and faster. Unless stopped at an early stage this process can very quickly lead to serious debt problems.
How to Avoid Credit Card Debt Problems
If you are ever tempted to overspend on you cards remember that doing so will only make your finances worse in the long term. Try to resist the temptation to buy the latest gadgets or clothes in the knowledge that this will enable you to afford more things eventually. If you already have credit card debts then consider carefully whether a debt consolidation program could help you to reduce your monthly payments.
Tags: credit cards, Debt Advice, Debt Problems, Debt Solutions
If you are considering going bankrupt, then you are obviously in a very serious debt situation. Bankruptcy may not be the best solution for you, so it is very important to consider the alternatives and get qualified debt advice.
What are the Consequences of Going Bankrupt
In the UK, the consequences for bankrupts are quite severe. You will have your bank accounts frozen, you will have to sell any major assets that you own (house, car etc.), and you may have to pay some money each month out of your income to the insolvency service (this is quite rare). Certain professions do not allow you to be a bankrupt, e.g. accountancy or police.
You will not be able to obtain credit whilst you are bankrupt and you will find it extremely difficult to obtain once you have been discharged from your bankruptcy.
There is a risk of a criminal conviction if the investigation into your finances finds that you were reckless in the way that you got into debt (e.g excessive gambling etc.) and had no intention of paying it back. These types of convictions are quite rare and will only be applied in the most serious of circumstances.
What are the Benefits of Bankruptcy
Bankruptcy is the quickest route to becoming debt free. Once you have presented your petition and been declared bankrupt you will immediately be free of all your unsecured debts. This compares favorably with the timescale for an individual voluntary arrangement that can take 5 years or more to clear your debts.
Alternatives to Bankruptcy
If your situation is serious enough to consider bankruptcy then the only realistic alternative that will resolve your debt problem in a reasonable time is the Individual Voluntary Arrangement (IVA). This is suitable for people that have a profession that will not allow bankruptcy and also makes it more likely that you will be able to keep your home. As previously noted it will take longer to resolve your debt problems (5 years is the standard period but this can be shortened by making a lump-sum payment from a remortgage). There will be no investigation into your finances other than the proposal that the Insolvency Practitioner puts forward to your creditors.
Making the Decision Between Bankruptcy and an IVA
You should always seek qualified advice when deciding between bankruptcy and an IVA. The following is offered as guidance only:
You should try to arrange an IVA if: You have significant assets that you want to protect. You are in a profession that doesn’t allow you to be bankrupt. You are worried that your conduct might leave you open to criminal conviction.
You should consider bankruptcy if: You don’t own you own home. Your job is not money related and there are no known restrictions on you becoming bankrupt.
Tags: Bankruptcy, Debt Advice, Debt Problems, individual voluntary arrangements, IVA
If you’re in the middle of (or heading towards ) a debt crisis you need to get help to clear your debt now! If you ignore the problem then in 6 months time you will be no nearer to resolving the situation, and it will probably be a lot worse.
There is a strong human instinct to simply try and hide when serious and difficult problems are around. Unfortunately this approach may have worked for our ancestors when confronted with hungry predators of some sort, but it is absolutely the worst thing that you can do with a debt problem.
4-Step Plan to Get Help and Clear Your Debt
1. Find a qualified source of free debt advice, either a charity like the Citizens’ Advice Bureau or a respected debt management company, and make an appointment to see them
2. Write down a list of all your debts with outstanding balances. This might be a bit scary, but unless you can see the size of the problem you won’t be able to sort it out.
3. Prepare a detailed and realistic family budget showing all of your income and all of your essential outgoings on a monthly basis. This will show you the size of your debt problem and will help you and your debt advisor in assessing the most suitable form of debt solution. Your debt advisor will help you prepare a budget, but there is no harm in doing some of the work yourself.
4. Research the various different forms of debt solution (Informal Arrangements, Debt Management Plans, Individual Voluntary Arrangements, Full and Final Offers and Bankruptcy) so that you can have an informed discussion with your debt advisor when you meet with them.
Act Now and Start Your Journey to Becoming Debt Free
If you do nothing you will be in the same situation in 6 months time, dreading the phone ringing or another batch of threatening letters. Just imagine how much better you will feel if you have started to take control of the situation and moved that bit of the way down the debt resolution path. All forms of debt relief take some time to complete (a typical IVA can last 5 years), and sometimes that can put people off starting the process, but the longer you delay the more you are delaying the arrival of your debt free life.
I was in the middle of a debt crisis 4 years ago. Things only started to get better when I admitted to myself (and my family) that I had a problem and started to do something about it.
Tags: Bankruptcy, credit problems, Debt Advice, Debt Problems, Debt Solutions, IVA
