To begin managing your debt it is useful to have a full understanding of both your assets and liabilities this is an essential part of financial capability.
Assets are things that you own.
Liabilities are the things that you owe.
What is Debt?
Debt’ is, strictly speaking, the total amount of money owed at a particular point in time –it is also the involuntary inability to make payments when the payee expects to be paid immediately.
Some people may have a pre-conceived idea of people who happen to fall into debt but should remember Debt can be caused by several different reasons:
• Relationship breakup
• Ill heath
There are many different types of debts/Credit/Loans:
• Overdrafts: These provide a flexible means of accessing debt on a bank current account, up to a limit approved by the lender. Unapproved overdrafts normally attract penalty fees and higher interest charges than approved overdrafts.
• Credit cards (including store cards): These will have a credit limit set by the lender and normally require a minimum amount to be repaid each month – typically between 2 per cent and 5 per cent of the balance of debt. Store cards are a form of credit card which may only be used for buying from specified outlets, and the interest rate charged on store cards tends to be much higher than that of credit cards.
• Personal loans: These are loans, typically of terms between one and ten years, which may be either unsecured or secured against a property (such as a house) or other assets. Unsecured personal loans are not contractually linked to any assets the borrower buys. These are available from credit unions, banks, building societies, direct lenders, and finance companies.
• Hire purchase (HP): This is a form of secured debt over a period, normally of up to ten years in order to purchase specific goods. The legal ownership of the product only passes to the borrower when the final instalment has been paid.
• Mortgages: These are loans to purchase property or land and are normally up to twenty-five years.
• Alternative credit: these include mail-order catalogues, and payday loans. The interest rates tend to be extremely high and there are heavy penalties if you are late with your re-payment.
IMPROVING YOUR CREDIT RATING
A crucial factor in being able to access financial products is the your credit rating. It is important that you are aware that people with poor ‘credit scores’, even if they have high incomes, will have limited access to cheaper forms of debt. Most lenders ‘credit score’ loan applicants before releasing money. Although the exact practices vary from lender to lender, the credit score analysis can be broken down into four main areas:
1. Somethings can stop automatic approval: For example, a County Court Judgement (CCJ) –.
2. Affordability: This looks at the income and expenditure commitments of applicants, with an emphasis on existing debts.
3. characteristics: For example, how long someone has lived at their current address (and at previous addresses), several changes of address and banking arrangements can give an unfavourable credit scoring.
4. Security: This relates to the importance of security in deciding the level of risk and the interest rate
There are three credit agencies which hold credit reports on you: Equifax, Experian, and TransUnion (formerly Callcredit). It’s best to check all three reports at least once a year, because they all have an impact on your rating. There are free ways to check your credit rating:
• Experian – use MSE Credit Club, which offers full access to your Experian credit report for free anytime.
• Equifax – use Clearscore*, which provides free access to your Equifax report.
• TransUnion – use Credit Karma, which gives you free access to your TransUnion report.
These reports provide basic info about you, such as:
• Financial links to other people.
• Whether you’re on the electoral roll.
• Any credit accounts you have.
• Missed/late payments or defaults.
• Recent searches of your credit report (these only stay on your file for max one year).
SIX TIPS Which can help turn your debt situation around
• Don’t panic or ignore the problem: unopened bills won’t go away Get debt advice you can get debt advice via Stepchange/CAB etc.
• Get on a budget complete an income and expenditure document asap sometimes you need to see what you are spending before you are able manage your money. Money advice service have a great tool the money health check. https://www.moneyadviceservice.org.uk/en/tools/health-check
Why is it important to take the Money Health Check?
To Get free and unbiased advice and to change the way, you think about your money.
• Identify areas where you are overspending an income and expenditure is the best way to identify this.
• Start saving especially if you are living salary to salary, open a Credit Union Account set up a standing order account even it is a small amount.
• Stop creating new debt and start looking at all your debts and begin planning to pay them off.
• Automate your payments this way you are more likely to make your payments on time and ensure that it is set up so that payments leave your account the day you get paid.
REMEMBER IF YOU ARE IN DEBT SEEK HELP AS SOON AS POSSIBLE there free help and support available.
An important piece of legislation comes The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 will to come into force on 4 May 2021.
This is a new piece of legislation that is designed to give individuals in debt “breathing space” from their creditors. The legislation applies to individuals in debt and does not include businesses. I will be delivering an update about this via zoom shortly.