Time to end the debt spiral

Mahone1302

Ladies & Gents,

I would be very grateful for any advice on helping me get out of a current debt situation that has spiralled out of control. A bit of background...

In 2015 I separated from my partner with whom I have 3 children. I moved out of the house which she kept and I have no further responsibility for and nothing to gain from. It was her house which she owned as a result of inheritance. I worked and she looked after the kids full time. At this time I had a few thousand pounds worth of credit card debt, I'd say about 6 or 7 at a guess. I went from £0 rent/mortgage to £600 per month rent. We agreed for me to pay £150 per month in child maintenance (very low I know) but I also contribute to other costs as and when required and have the children 35% of the time - 3.5 days out of 10. When I moved out I basically had nothing but my car and my phone. My salary was £28000. Due to the massive increase in living costs I began to rely on credit cards, particularly when it came to buying everything that you need to kit out a house; furniture, appliances, tools etc, you name it. Nothing extravagent, much of it from the likes of B&M and Facebook sellers. No expensive tech or anything like that. On top of that I had to use the credit cards for stumping up deposits on my flat which I initially lived in, then the 3 bedroom house which I moved in to in February 2017, which has increased my rent now to £750 per month, but is necessary due to the size of my family.

I initially had the credit cards under a reasonable amount of control. I had an excellent credit rating and history and was able to take advantage of 0% balance transfer deals on a regular basis, and was able to move money around between different cards. Unfortunately things went tits up I'm now in the position that I have £25000 worth of debt over 4 credit cards and 2 store cards that are all very close to being maxed out. The 0% interest free periods are almost all over and I'm left with 25% interest rates. My salary is now £32000 (take home approx £1900) and will increase to £35000 at the end of this month and £38000 in 12 months time. This will help significantly.

I want to get out of this situation. I'm paying £580 per month in total to the cards - minimum payments. I also have a car which I'm paying £143 per month for, with the final payment being in May 2020. My settlement figure is about £3400. The car is necessary for work and childcare. Due to the huge credit card repayments I am falling short at the middle of the month, and - you've guessed it - spending on credit cards to plug the gap. This situation is unsustainable.

I have initially looked in to a loan to consolidate my debt. I currently have £600 of savings with a credit union and they offer a loan of up to £25000 at a rate of 7.9%. The rate is a little high but is guaranteed, not subject to change on application like it is with the likes of Tesco etc. The monthly payments will be approx £430 which is significantly less than what I am paying now, and the term of the loan will be 6 years. 6 years until I am debt free. The credit union is one which is specifically set up for my occupation, so the service is a little more personal and sympathetic than the big banks. I understand however that they may not give me the full £25000, if anything at all. It seems like a no brainer, but it also seems too easy.

I have been offered £3500 by a relative which I won't have to start repaying for 2 years. I won't owe them any interest and they will want me to pay back around £150 per month. This will give me some breathing space whilst I try to get things in order, and effectively postpone some of my debt until my salary has increased by £6000.

I'm trying to work out how best to use this lumpsum. Do I use it to pay off my car, freeing up £143 per month for the next 2 years? Do I use it to pay off a chunk of my credit card? I've tried using a Snowball Calculator but it's frying my brain, and it looks to me that the focus of such calculators is about paying off debt as quick as possible, not getting payments down to a manageable amount. Even paying £600 per month to the cards, I'd still not get out of debt for over 6 years. Paying £3500 towards my credit card debt now will not free up £143 per month as it would if I used it to pay off my car.

I need to get out of this situation. I need to reduce my monthly payments to something that is manageable and won't mean I'm having to dip in to the credit cards at the end of the month. I've tried cutting my spending down but it's not that high anyway. I don't buy expensive food, I don't smoke or drink or take drugs, I don't buy video games and I don't have expensive entertainment packages. I rarely go for nights out or meals out. I make food at home to take to work so I'm not buying meal deals and takeaways every day. I don't go on holidays. I have TalkTalk internet at approx £30 per month, and Freeview TV. My mobile phone is now on a SIM only contract at around £8 per month. I do my best to conserve gas, electricity and water. My car insurance is around £300 per year and can't be reduced further. I am taking advantage of the 25% single occupant council tax discount.

Any ideas or advice will be greatly appreciated.

Dobbibill

Hi Mahone,

The first thing to do is fill out a SOA. This will give us the opportunity to look at the bigger picture.

A consolidation loan is not normally the best solution and can very often give a false sense of disposible income because of the lower payments/longer term but causes more debt to creep in.

We can have a look at your SOA with fresh eyes - the first thing you need to look at is a solution to stop plugging the gap mid-month (you are getting deeper).

You have a fair income and look to be doing many thing right such as the single person discount on council tax, SIMO mobile and freeview etc.

Post up the SOA - let's have a look together

Mahone1302

Thanks for your reply. I'm just getting in to bed to give my fried brain some rest before I get up for work at 5am! I'll fill in an SOA tomorrow evening and come back here with the results.

Mahone1302

Can you recommend a decent SoA form? I've just looked at the one on Stoozing.com but it doesn't look very good; can't put in end date for car finance, no option to put in minimum cc payments by percentage (only accepts an amount) etc...

Mahone1302

Forget my post above, I guess the whole point of an SoA to look at the situation today. I've tried to make it as accurate as possible:

Statement of Affairs and Personal Balance Sheet

Household Information
Number of adults in household........... 1
Number of children in household.........
Number of cars owned.................... 1

Monthly Income Details
Monthly income after tax................ 2100
Partners monthly income after tax....... 0
Benefits................................ 0
Other income............................ 0
Total monthly income.................... 2100

Monthly Expense Details
Mortgage................................ 0
Secured/HP loan repayments.............. 143.3
Rent.................................... 750
Management charge (leasehold property).. 0
Council tax............................. 115
Electricity............................. 30
Gas..................................... 30
Oil..................................... 0
Water rates............................. 25.61
Telephone (land line)................... 0
Mobile phone............................ 10
TV Licence.............................. 12.37
Satellite/Cable TV...................... 10
Internet Services....................... 33.5
Groceries etc. ......................... 250
Clothing................................ 5
Petrol/diesel........................... 60
Road tax................................ 0
Car Insurance........................... 30
Car maintenance (including MOT)......... 5
Car parking............................. 0
Other travel............................ 0
Childcare/nursery....................... 133
Other child related expenses............ 0
Medical (prescriptions, dentist etc).... 0
Pet insurance/vet bills................. 0
Buildings insurance..................... 0
Contents insurance...................... 5
Life assurance ......................... 0
Other insurance......................... 0
Presents (birthday, christmas etc)...... 20
Haircuts................................ 0
Entertainment........................... 0
Holiday................................. 0
Emergency fund.......................... 0
Total monthly expenses.................. 1667.78


Assets
Cash.................................... 600
House value (Gross)..................... 0
Shares and bonds........................ 0
Car(s).................................. 0
Other assets............................ 0
Total Assets............................ 600


Secured & HP Debts
Description....................Debt......Monthly...APR
Mortgage...................... 0........(0)........0
Hire Purchase (HP) debt ...... 3584.....(143.3)....0
Total secured & HP debts...... 3584......-.........-

Unsecured Debts
Description....................Debt......Monthly...APR
Halifax CC.....................685.51....19.38.....25.95
MBNA CC........................6833.41...176.......25.9
Virgin CC......................9999.7....145.4.....19.17
Argos SC.......................625.22....10.44.....29.9
Next SC........................215.75....12........22.9
Barclaycard CC.................8153.72...207.......27.9
Total unsecured debts..........26513.31..570.22....-


Monthly Budget Summary
Total monthly income.................... 2,100
Expenses (including HP & secured debts). 1,667.78
Available for debt repayments........... 432.22
Monthly UNsecured debt repayments....... 570.22
Amount short for making debt repayments. -138

Personal Balance Sheet Summary
Total assets (things you own)........... 600
Total HP & Secured debt................. -3,584
Total Unsecured debt.................... -26,513.31
Net Assets.............................. -29,497.31

Created using the SOA calculator at https://www.stoozing.com.
Reproduced on Moneysavingexpert with permission, using Firefox browser.

Dobbibill

Mahone1302 wrote: »

Forget my post above, I guess the whole point of an SoA to look at the situation today. I've tried to make it as accurate as possible:

Statement of Affairs and Personal Balance Sheet

Household Information
Number of adults in household........... 1
Number of children in household.........
Number of cars owned.................... 1

Monthly Income Details
Monthly income after tax................ 2100
Partners monthly income after tax....... 0
Benefits................................ 0
Other income............................ 0
Total monthly income.................... 2100

Monthly Expense Details
Mortgage................................ 0
Secured/HP loan repayments.............. 143.3 How long are you paying this for?
Rent.................................... 750
Management charge (leasehold property).. 0
Council tax............................. 115 Is this over the standard 10 months? Is so switch to 12.
Electricity............................. 30
Gas..................................... 30
Oil..................................... 0
Water rates............................. 25.61 As above - is this over 10 months too?
Telephone (land line)................... 0
Mobile phone............................ 10
TV Licence.............................. 12.37
Satellite/Cable TV...................... 10 this will need to go in the short term
Internet Services....................... 33.5
Groceries etc. ......................... 250 You should be able to shave £50 - £100 off this if you batch cook and meal prep.
Clothing................................ 5
Petrol/diesel........................... 60
Road tax................................ 0
Car Insurance........................... 30
Car maintenance (including MOT)......... 5
Car parking............................. 0
Other travel............................ 0
Childcare/nursery....................... 133 how long before child care isn't needed?
Other child related expenses............ 0
Medical (prescriptions, dentist etc).... 0
Pet insurance/vet bills................. 0
Buildings insurance..................... 0
Contents insurance...................... 5
Life assurance ......................... 0
Other insurance......................... 0
Presents (birthday, christmas etc)...... 20
Haircuts................................ 0 never cut your hair?
Entertainment........................... 0
Holiday................................. 0
Emergency fund.......................... 0
Total monthly expenses.................. 1667.78


Assets
Cash.................................... 600 what's this?
House value (Gross)..................... 0
Shares and bonds........................ 0
Car(s).................................. 0
Other assets............................ 0
Total Assets............................ 600


Secured & HP Debts
Description....................Debt......Monthly...APR
Mortgage...................... 0........(0)........0
Hire Purchase (HP) debt ...... 3584.....(143.3)....0
Total secured & HP debts...... 3584......-.........-

Unsecured Debts
Description....................Debt......Monthly...APR
Halifax CC.....................685.51....19.38.....25.95
MBNA CC........................6833.41...176.......25.9
Virgin CC......................9999.7....145.4.....19.17
Argos SC.......................625.22....10.44.....29.9
Next SC........................215.75....12........22.9
Barclaycard CC.................8153.72...207.......27.9
Total unsecured debts..........26513.31..570.22....-


Monthly Budget Summary
Total monthly income.................... 2,100
Expenses (including HP & secured debts). 1,667.78
Available for debt repayments........... 432.22
Monthly UNsecured debt repayments....... 570.22
Amount short for making debt repayments. -138 You could probably shave this from above in the food budget in the short term.

Personal Balance Sheet Summary
Total assets (things you own)........... 600
Total HP & Secured debt................. -3,584
Total Unsecured debt.................... -26,513.31
Net Assets.............................. -29,497.31

Created using the SOA calculator at www.stoozing.com.
Reproduced on Moneysavingexpert with permission, using Firefox browser.

There isn't a great deal of room for wiggle on your SOA - I've called out the areas I think could be tweaked to break you even.
I think it's all about damage limitation from here. The easiest option would be a DMP but then that trashes the credit files for 6 yrs.
Another option is a 2nd job/overtime to earn money to throw at the debt and as one finishes throw the minimum payment and overtime money at the 2nd debt and so on but that is going to take time, determination and hard slog.

Mahone1302

Thanks for your reply again.

The council tax is over 10 months, should there be an option for 12? The water rates is over 12.
The £10 Satellite is actually Netflix. This is only entertainment that I pay for and is used heavily by both myself and the kids. I don't think the £10 saved would be proportionate to the loss personally.
As for the food, bare in mind that I have 3 children with me 35% of the time, that works out as almost 12 days a month, 30 meals each per month. I imagine I can reduce it a little but I'm already batch cooking.
The £133 for childcare is my child maintenance payment, and the oldest is 8, so I've got a good 10 years yet before that changes!
I don't pay for haircuts as I have a relative do them for free!
The £600 cash is my savings in a credit union.
The £143 HP payment is my car, this is due to end in May 2020.

What about the ~£3500 lump say that a relative is lending me and won't need repayment for 2 years? What would I be best using that for right now? Credit cards, or to pay the car off and remove a £143 per month payment?

I've read a little about DMP's but don't really know much about them. Stepchange suggested that I reduce my monthly repayments on my credit cards to £1 each. Is this the same thing? I'd like to try and keep the credit rating half decent if possible.

A 2nd job unfortunately isn't an option. At present I work 6 days in a row - 2 earlies, 2 lates, 2 nights, then 4 days off - the 4 days off are when I have my children.

Dobbibill

Mahone1302 wrote: »

Thanks for your reply again.

The council tax is over 10 months, should there be an option for 12?

You normally have to ask for 12 months - they don't generally volunteer the information.

The £10 Satellite is actually Netflix. This is only entertainment that I pay for and is used heavily by both myself and the kids. I don't think the £10 saved would be proportionate to the loss personally.

If it's used plenty by the kids, I definitely see your point.

What about the ~£3500 lump say that a relative is lending me and won't need repayment for 2 years? What would I be best using that for right now? Credit cards, or to pay the car off and remove a £143 per month payment?

The ideal way to use the money would be to throw it at the highest interest bearing debt - it saves the costs long term but does seem disheartening if this is one of the higher debts.

If your car is really on 0% - as per SOA - then it's best thrown at the Argos and Barclaycard debt.
BC are known to provide existing customer offers so it may provide a little wiggle room for that on your limit. Although moving debt isn't the same as paying it off, moving it to 0% is always better than paying interest.

I've read a little about DMP's but don't really know much about them. Stepchange suggested that I reduce my monthly repayments on my credit cards to £1 each. Is this the same thing? I'd like to try and keep the credit rating half decent if possible.

Yes, this is pretty much what it is - token payments for a while then an affordable monthly payment based on your SOA, leaving you enough to live on.
If you want to try to keep your files in tact this is not for you. While you haven't got a great deal of wiggle room, you have just about with a few tweaks got a do-able budget. Your credit files would be marked as an arrangement and would impact you going forward.

System

So you have £4100 lump sum with your credit union.

If you snowball - you should pay off the Argos first, and then the rest onto your barclaycard, reducing the BC to £3418.92 (essentially reducing your BC by 50%. so assuming the monthly payment drops by 50%, you would get £80 a month back into your budget.
so paying off your car would get you more cash back into your budget - and then if you live with tight budgeting you can wait until your pay increases and then up your debt repayment.

Just a couple of other thoughts / comments: No road tax in SOA but diesel - is this correct?
It might be worth keeping your £600 savings for an EF - so at least you have something to cushion you if something unexpected happens.

It definitely very tight. Do you have surplus stuff you could sell to help you manage in the short term?

keep posting xx

enthusiasticsaver

Normally I would not recommend consolidation loans as it allows people to think they are debt free but of course they aren't. Can you move any of those cards to 0% deals or are you now being declined due to being overextended?

The £3500 should be used on the most expensive debts. I would pay off the Halifax, Argos and Next and the rest off the Barclaycard. Cut up and close the three cleared accounts. This will help with your credit rating and maybe allow you to move the rest of the Barclaycard to a 0% deal. The pay rise and reduction off the credit card payments should be sufficient to cut your shortfall. Gradually you should be able to move the rest of the cards to 0% but you must stop spending on them and close them as you clear them

Mahone1302

Thanks! Road tax is £20 or £30 annually so I just factored it in to my insurance cost. It sounds to me like paying the cat off would give me the best balance between reducing debts and increasing my ability to cover monthly costs! Nothing to sell unfortunately. The salary increases are imminent; 3k increase this month, a further 3k in 12 months. These are guaranteed and linked to length of service at work.