Just found out my friend has £12,000 on credit cards

sprintstar

I've just found out that my mate has managed to get himself into £12,000 worth of debt. He has been out of work for around 7 months now, not through his own lack of trying at all, and this has partly contributed to his situation today, which up until now has been perpetual cycle of living off credit cards, and using one credit card to make the minimum repayment on another.

He has just managed to find a job now, which starts on Monday (I'm not sure if it's relevant but it will pay around £14k+~£2k commission), which has given him the incentive he's needed to finally tackle the problem (and confide in me), and he's told me that he's signed up with a debt management plan with a company called Debt Free Direct, or something along those lines. They've arranged to consolidate his current loans, so that he will end up paying around £200 a month for around 7 years, I think it was, sorry I can't remember the exact details, but anyway the final amount that he would be paying off would be around £17k.

The reason for this post was I was wondering if this was the best course of action that he could have taken? I know you hear horror stories about debt consolidation companies, but he will be paying far less interest than he would have been if he'd kept the debt on his credit cards, some of which were up to 20% interest, and he now has an end point in sight, and something concrete to aim for, which is better than the credit card debt, isn't it?

Sorry for any vagueness in detail, and sorry if I've breached any DFW etiquette (be gentle, I am new here!) but any help really appreciated.

Willsnarf1983

debt free direct will be charging him a fee, he is better going to CCCS or payplan as these are free and cost nothing

Will

Starry-eyed_surprise

Perhaps you could persuade your friend to have a look at this site/join the DFW boards himself? It might just be the help he needs to support him along the way.

By the way, I think you are a really good friend to care in this way. He is lucky to have someone to confide in and to support him.

Emmzi

Bottom line, if he's all signed up and committed now, not much point worrying about better routes there could have been for him? However be aware that a debt management plan is a different beast to a consolidation loan. Which does he have?

General points
- consolidation loans ARE rarely a good idea. They may have a slightly lower interest rate but tend to be over much longer periods so overall interest paid a shocker, plus YOU pay arrangement fees. They tend to cost more in the long run and extend the life Of your millstone considerably. However if this is what he has AND he's locked in - no point raising it as he's stuck.
- for debt management plans or IVAs (see payplan website for info on what these are), CAB, Payplan or CCCS tend to get better results as they are charities and sometimes viewed more favourably by creditors; and don't charge a fee to the borrower (except IVA fees sometimes) Also something like Justabank (online debt monitoring service) can be motivational as you see your debts go down - don'talways get these with commercial companies, but I think Payplan and CCCS do versions of them.

A good question to ask if he is on a DMP is 'what is your monthly fee to Debt Free Direct'?

Then make him aware that if he moves to one of the charities, this amount could be going to his creditors.

sprintstar

Thanks for the responses everyone, I would have directed him to post here, but he's, not very computer literate unfortunately.

Emmzi, as far as I know it is a debt consolidation loan that he has, I must've got a bit mixed up with my terminology in my original post! As you say it may well be too late now, and from the sounds of it he would been better off opting for a debt management plan, but can I pick your brains a bit more, just for a bit of reassurance?

Emmzi wrote:

General points
- consolidation loans ARE rarely a good idea. They may have a slightly lower interest rate but tend to be over much longer periods so overall interest paid a shocker, plus YOU pay arrangement fees. They tend to cost more in the long run and extend the life Of your millstone considerably. However if this is what he has AND he's locked in - no point raising it as he's stuck.

The thing about it was, he was only ever paying off the minimum amount (that was all he could afford) on his credit cards, and his monthly payments with the new loan work out as about the same or maybe slightly more than that. But the key difference is that the debts will be paid off in 7 years, whereas before it would have taken something silly like 18 years to pay them off, and at a higher interest rate. I suppose what I'm asking really is that, even bearing in mind consolidation loans are generally a bad idea, in his case isn't it much better than having all that money sat on credit cards instead?

CLAPTON

has he in fact apid off all his CCs and has he closed them down...the main danger of consolidated loans is that the credit card bills start to build up again then you're back to square one but with a big loan as well as the CC debts.

lynzpower

OK, heres why consolidation isnt a great idea ( another one burned by them here)
An example, Im using *you* as In anyone etc

You have 12k on ccs and struggling to meet minimum payments
You choose a consolidation loan
that loan will stretch out for years and may have penalties for overpayment or for ending it early ( ie coming up with the cash from elsewhere to settle early eg a promotion, gift etc )
this loan amount will have interest added to the interest thats already ammassed on the CCs
Many loans are interest fronty loaded, so it can take a good while ( in my case almost 2 years!) of paying off the interest FIRST, and then starting to whittle at the actual debt itself
You suddenly feel Pheewwwww thats a relief, now I only pay 200 a month and sorted
Consolidation hasnt taught you anything about how to manage money
Again, you struggle for money, and get another credit card, as its easy now, as you are no longer maxed.
IN a short while, you realise that in addition to your loan you now have other debts.

The DFW way.

I realise hell I have 12k on CCs and struggling to pay them
First thing to do is stick up an SOA, think how can I cut back, if I cut back nad get organised, CAN I pay this off more comfortably?
Ill move my CCs to a lower interest one (ie 0%, low LOB) so no interest is charged
Alter lifestyle to pay as much off debt as possible by using cutbacks, and tips found on MSE, selling things on ebay, trying to find second income etc
(If this isnt possible and there is no way I could afford to live on whats left over after paying my creditors, then time for a DMP, IVA or to consider bankrupcy)
After each card paid off close each card down, close overdrafts, and so forth.

Thats generally the difference, HTH

sdj25

if he's only just signed up, i.e. confirmed over the phone / registered on inet - he will have a "cooling off period" is he still in that? May be an idea to bring this up to him.

As part of the distance resellers act you do have between 7-14 days to cancel (it used to be 7, but heard rumours it was going up to 14 - not sure if that ever came to pass though).

lynzpower

if its a loan then I understand you get 14 days whatever under the consumer creduit act ?

Emmzi

sprintstar,

if he finds it easier to work with one fixed payment in his budget, then sure, the loan may work for him. However he HAS to close and cut up credit cards/ accounts; he now HAS to live within hs budget; or a year down the line, he'll be in the same place. (Done it. Three times. First time I was made redundant I thought I was going to never come out of my 35-40k debt depression.)

It sounds like he isn't too sharp on the paperowkr and you're trying to help him out a bit with the maths here? If he is game, have a look at the loan papers; and sit down and do a full budget with him. It may be worth setting up a standing order into a seperate 'cash only' account with only an ATM single function card on it) for his weekly spends after all bills paid. Might also be worth getting him saving in a credit union so he has a SMALL amount of lowish cost finance available for emergencies only (eg washing machine expodes before he has a bank of savings to use).