As the mania of December settles and we face the new year, everyone is watching the pennies and trying to recover from the financial damage of Christmas. This is always a little easier in January because everyone is in the same boat, but even without suffering from the after-effects of Christmas, households across the country are struggling to make ends meet. According to a report by the Financial Conduct Authority, on average 50% of adults in the UK show ‘characteristics of potential vulnerability’, with 15% being over-indebted.
The FCA defines ‘over-indebtedness’ as ‘considering a heavy burden keeping up with domestic bills and credit commitments, or missing any credit commitments and/ or domestic bills in any three or more of the last six months’. The report showed that 40% of families and 57% of vulnerable families are behind on their bills. There has been some suggestion that these financial difficulties are due to unnecessary spending and increased access to unsecured loans, and while this might be partly to blame, in the majority of cases it is due to an income shock, such as prolonged illness or redundancy. As the average adult in the UK has £3,320 in unsecured debt, even a small change in income can result in financial difficulty. Whether it is a result of the cost of living being too high, unnecessary spending or the tempting availability of unsecured loans, this is undeniably a problem that households across the country are dealing with.
January is a busy time for financial advice services, such as the Money Advice Service and the debt charity, StepChange, as people seek help after the pressure of Christmas forces them to spend more money on credit cards and other lines of credit. Each year families across the country feel obliged to buy children’s gifts on credit as expectations for a perfect Christmas are so high. The first piece of advice StepChange gives is to face the problem by opening those credit card statements and bills and calculating the total amount owed. This might seem like an obvious step, but a common reaction to financial stress is avoidance, as the reality is sometimes a little too overwhelming to truly accept and deal with. It is difficult to find the best solution without knowing the full extent of the problem. In some cases it can be gradually resolved by detailed budgeting, using budget apps that sync with bank accounts, providing up-to-date and categorised information on spending habits and any areas where money can be saved. National Debtline, the debt advice service, offers a free budget calculator to help people identify areas of their spending that can be changed to save money and exactly how much income they need to make ends meet and clear any debt. Alternatively, taking out a debt consolidation loan or secured loan, such as a logbook loan secured against a vehicle, can give people a little wiggle room to gradually get back on their feet. The payments are spread out over a year or more and, if you have a secure income and can guarantee that you will be able to meet the payments each month, a loan can give you peace of mind, knowing the debt is being dealt with.
For those facing a high amount in unsecured debt, if they can only afford to make the minimum payments, it can take an unrealistic amount of time to ever clear the debt, usually resulting in even more debt being built up over the years. Increasing income in small but manageable ways is one way that many people in the UK are trying to deal with their financial issues. Whether this means agreeing to more overtime, taking a part time job, working from home while the kids are asleep or setting up a shop selling homemade goods on Etsy, there are many ways to supplement income to chip away at that debt each month. Alternatively, the Money Advice Service has a Quick Cash Finder calculator that helps you to work out exactly how much you are spending on insignificant treats or habits, such as takeout coffees, beers after work or the occasional cigarette. It can be surprising how much these little treats add up to over a year. This could then be put towards clearing debt, giving you an easy way to reduce your outgoings and chip away at that debt.
The debt charity, StepChange, has a 60-second debt test made up of five simple questions to help people identify if they have a debt problem and how severe it is. They then go on to offer suggestions for the next step. Their help ranges from tips and tricks to save money and avoid debt, to detailed advice on Debt Management Plans (DMP), Individual Voluntary Arrangements (IVA), Debt Relief Orders (DRO) and bankruptcy. A DRO or bankruptcy are two extreme solutions, intended for those with severe financial problems, exceeding £5000 of debt (but less that £20,000 to be eligible for a DRO) and have lasting effects, including having a detrimental effect on credit ratings and your ability to receive credit in the future. However, for many people there are other solutions that will not affect their credit rating but will allow them to take control of their financial situation. With half of the country financially vulnerable, the work of these financial advice services, such as StepChange, Money Advice Service and National Debtline, can really change lives.