The last couple of years have been a source of financial stress for many, with over 50s among the worst affected.
Although redundancy levels have eased since the height of the pandemic, many over 50s are still feeling the effects of job losses during this period.
Debt is on the rise too, not helped by sky-high inflation, with the Bank of England’s latest Money and Credit report revealing that we borrowed another £1.5 billion in November 2022, with £1.2 billion of this put on credit cards.
Here, we outline some steps you can take if you think your debts are starting to spiral out of control.
1. Understand your debts
Struggling to stay on top of your debts can be really stressful. It might be tempting to bury your head in the sand and hide all those red bills in a drawer, but the first step to taking control of your debts is to sit down and work out exactly how much you owe.
To get started, make a list of all your debts, including any loans, mortgages, credit cards, unpaid bills and overdrafts. Jot down how much you owe against each of these, how much you are currently repaying each month, any interest rates that are being applied to your debts and the dates payments need to be made.
You can then compare this against your monthly income to see whether you have enough money to cover your repayments each month. A lot of lenders use a calculation called the ‘debt-to-income ratio’, which is a simple sum you can use to work out whether your debts are something you can manage by yourself or whether you might need to get help to work out a payment plan.
You can work out your own debt-to-income ratio by dividing your total monthly debt payments by your total monthly income and then multiplying it by 100. This will give you a percentage score, which you can use to help determine your debt payment strategy.
Generally, the lower the score the better, with the healthiest range falling between 0% and 40%. If your score creeps up towards 50% you might be facing possible financial trouble, so you might want to consider paying the maximum debt payments you can afford to try and reduce your ratio. If your score is over 50%, more than half of your monthly income is being spent on debt payment, which could mean you are in financial danger. If this is the case, you should try to pay the maximum debt payments you can afford and you should seek professional advice.
John has a monthly income of £1,900 (after tax) and is working out his debt-to-income ratio so makes a list of all of his debts:
|Credit card minimum payment||£25|
|Car finance payment||£400|
John then calculates his debt-to-income ratio:
£1,095 / £1,900 = 57 x 100 = 57%
His score of 57% means he is in financial danger and should seek professional advice on the best way to reduce his debts.
2. Look at your budget
Once you have a clear understanding of your debt situation, you will need to consider how you are going to start making debt repayments and how much you can afford to pay off each month. If at all possible, it is worth trying to reduce your outgoings so you can be as aggressive as possible with your debt repayments.
Maintaining a sensible budget can also stop you from having to borrow more money to cover your costs. Our articles Budgeting if your income has reduced and How to save money – 17 money saving tips can help you work out a monthly budget and reduce your outgoings.
3. Make a payment plan
Once you’ve added up your debts, and looked at ways you can reduce some of your monthly costs, think about the best ways to pay back what you owe. Paying your bills on time, if you can afford to, will mean that you avoid late payment fees, so mapping out the monthly payment days in a payment calendar can help keep you on top of it all.
If you have savings, you will usually be better off using those savings to clear your debts as most debts typically charge much higher interest rates than you can earn on your savings.
Which debts should you pay off first?
The best plan is usually to start paying off any debts that could affect the roof over your head, such as your mortgage or rent. These are known as ‘priority debts’.
These debts have the most severe consequences if they aren’t paid, including: court summons, utilities and services being cut off, being visited by bailiffs, being made bankrupt or worst of all, losing your home.
Examples of priority debts include:
- Rent arrears
- Mortgage arrears or secured loan arrears
- Council tax arrears
- Gas or electricity bills
- Phone or internet bills
- TV licence payments
- Court fines
- Overpaid tax credits
- Payments for goods bought on hire purchase or conditional sale
- Unpaid income tax, National Insurance or VAT
- Unpaid child maintenance
If you have to pay more than one of the above or if you are facing immediate action on any of the above debts (i.e. you are facing eviction or a court summons), you should contact your local Citizens Advice who should be able to advise you on what your next steps should be.
Non-priority debts often have less serious consequences if they go unpaid than priority debts. However, if you don’t tackle them you could still face court action or bailiffs if your creditor tries to reclaim the money you owe.
Non-priority debts might include:
- Personal or payday loans
- Credit card or store card debts
- Catalogue debts
- Banks or building society loans
- Unpaid water or sewerage bills (unlike gas or electric, your water supply can’t be cut off, but the longer you leave it the pay, the more money you will owe)
- Benefit overpayments – apart from tax credits
- Parking Penalty Charge Notices
- Money you might have borrowed from family or friends
While non-priority debts are not as urgent as priority debts, they still have consequences if you don’t pay them. Try to pay at least the minimum payment each month. This will help to stop any late fees being added to your account, and can help prevent your debts from spiralling out of control.
Remember that the higher the interest rates you’re being charged on your borrowing, the more you’ll have to repay in the long-term. Credit cards often charge some of the highest interest rates, so if you are able to pay back more than the minimum amount each month, it’ll help you pay back what you owe more quickly. You might be able to reduce your interest charges by moving your credit card debts to a balance transfer card which offers a lengthy 0% introductory rate, or by consolidating your debts using a low cost personal loan. Find out more about these options in our article Balance transfer credit cards and personal loans compared.
Taking steps to control your debts
As well as making sure you keep up with your monthly repayments, there are some other things you can do to drive down your debts. Options could include:
Making the most of government schemes
There is a UK government scheme called ‘Breathing Space’ which gives people struggling with debts legal protections from their creditors for 60 days, with most interest and penalty charges frozen, and enforcement action halted. Additionally, if you are suffering with a mental health crisis that is impacting your debts, you may be able to access even more protection and assistance.
The scheme is only available through professional financial advisors, such as StepChange, National Debtline and Citizens Advice, and through the scheme you can receive professional debt advice to design a plan to help you get your finances back on track.
Releasing equity from your home
Equity release is a way of unlocking some of the wealth tied up in your property, without having to sell your home. For some, it can be a useful way to raise cash to pay off debts, clear an existing mortgage, boost retirement income, or help out family.
However, equity release is not an option that will work for everyone and has longer term financial implications, so while it may solve your debt problems short term, it’s important to know all the pros and cons before committing.
You can read more about equity release in our article Equity release – what is it and how does it work?. We also have a number of Equity Release Guides that can give you a clear explanation of what you need to consider. Always seek professional financial advice before considering this route, as there are a number of downsides to consider, not least that releasing equity from your home could affect your entitlement to benefits, and will reduce the value of any inheritance you might have planned to leave your loved ones.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
If you think that you are going to miss a repayment on a loan or any other type of debt, it’s best to be proactive and contact your lender directly to tell them you’re having problems. Depending on the type of debt you have, your lender might be able to offer you a payment holiday or work out an alternative payment plan with more affordable monthly repayments.
4. Where to find debt advice
Working out what you owe and how you’ll repay your debts can feel overwhelming, so if you are struggling it’s a good idea to seek professional advice as soon as possible.
There are plenty of free sources of advice available and many charities and organisations can help you negotiate debt repayment plans with your creditors on your behalf. These include:
- Citizens Advice – 0800 144 8848 (England) 0800 702 2020 (Wales)
- StepChange – 0800 138 1111.
- National Debtline – 0808 808 4000
- PayPlan – 0800 280 2816
Whatever happens, don’t suffer in silence, as struggling with debts on your own can take a real toll on your mental health. If you are finding it hard to cope, our article Are money worries affecting your mental health? explains where to go for help if you need someone to talk to.