Debt advice: Do I need it?

25 July 2008

Do I need debt advice? How much debt is too much? Are my problems sorting themselves out or getting worse?

If you’re in financial difficulties, some well-timed debt advice can make all the difference – and the word ‘well-timed’ is important here. In general, the sooner you get debt advice, the easier (and cheaper) it’ll be to put your debts behind you.

Debt advice: 3 basic rules
Rule 1: Know what you owe
Rule 2: Understand your ‘safety margin’
Rule 3: Seek debt advice sooner rather than later

Know what you owe
As any debt adviser will tell you, the best way to keep your debts under control is to stay on top of your financial situation. If you don’t really know what you owe, it’s much harder to spot potential problems before they grow too large.

So, figure out exactly how much you owe:

Include	Leave out
Your non-priority debts (unsecured loans, overdrafts, credit cards, store cards, etc.)	Whatever you owe on your mortgage / in secured loans.
Any arrears you owe on your priority debts (rent / mortgage, secured loans, VAT, utility bills, tax, etc.)	Your latest bills for your priority debts*.

*The latest bills (but not any arrears you owe) for your priority debts count as living expenses.

If the total is:	Then:
Less than 3 months’ income (after tax)	As long as you keep up the repayments (and nothing major changes), your debts seem to be affordable. But watch out for warning signs, and seek debt advice if you think you need it.
3-6 months’ income	You’re in danger of running into trouble, especially if you take out more credit. You’d be a lot safer if you could bring your debts down to under the ‘3-month’ mark – if you’d like some tips on doing this, get some professional debt advice.
More than 6 months’ income	There’s a real chance your debt problems will get worse. You should seek professional debt advice – and start paying your debts off – as soon as possible.

Understand your ‘safety margin’
There’s no ‘safe’ level of debt. No-one can see the future, so any debt can be dangerous if your circumstances change enough – if you lose your job, for example, or if the rising cost of living starts taking up too much of your income.

Even so, the ‘Know what you owe’ section above should help you figure out where you stand. If you realise your debts add up to two-and-a-half months’ income, even a small unexpected event (like replacing the cooker or having the car fixed) could push you into that second group. Remember: you don’t have to wait until you’re in trouble before you seek debt advice.

Seek debt advice sooner rather than later
If you act before your debts get too big, you might be able to sort them out with a bit of debt advice – for example:

• tips on budgeting
• advice on talking to creditors
• help understanding financial terms

The longer you leave it, the more likely it is that debt advice won’t be enough on its own: if your debts grow beyond a certain point, you’re almost certain to need a professional debt solution such as a debt management plan, debt consolidation loan or IVA (Individual Voluntary Arrangement).

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