You might not realise it, but practically every person over the age of 18 has some form of debt these days. When you're younger, it might be a student loan or possibly even money borrowed from your parents that they'd like you to pay back (some day!). As you gain responsibility and move into a flat or house, it'll be the bills you pay like rent, council tax or utilities. And as you start a family and have kids, it'll probably wind up being a mortgage on a property, a couple of credit cards and maybe even a loan or some kind of finance agreement for a car.
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While it might seem obvious that all these things have to be paid for though, the truth of the matter is that sometimes, your finances just don't seem to be able to cover all the things you want to do. Maybe you plan badly and just happen to run out of money halfway through the month, meaning a couple of bills go unpaid; perhaps something goes wrong at work and you don't get enough cash to pay the rent for the month; or, heaven forbid, you decide you've got better things to spend your income on and end up pushing your financial commitments to one side (believe us, we've seen it happen!). Whether they're accidental or deliberate though, these are all situations you want to avoid - if you don't, you'll not only be kick-starting a chain of events that'll leave you even further in debt, but also wind up with a bad credit mark on your credit history.
Of course, things can often only get worse if you let bad credit debt get out of hand. A few missed bills cause debt to build up to a level that you can't afford in a single payment, which then cause your other debts to suffer, which then creates more bad credit on your record. This then makes getting loans to cover your debts more difficult, which only creates more problems since you then have mounting debts and nowhere near enough money to cover them. It seems like an endless spiral and, to be fair, it can be if you don't take action quickly enough. Thankfully though, there are several ways of stopping yourself spinning out of control...
The first is rather obvious: don't miss payments on any debts you have in the first place! This might mean careful management of your income if you're only just earning enough to cover the bills, awareness of what you're using in terms of utilities to keep bills down (for instance, energy monitors are useful for lowering electricity bills and switching to a pay-as-you-go mobile can prevent you running up massive phone charges without realising it) and even changing your tastes in groceries to something more affordable (believe it or not, the 'value' ranges that supermarkets have often taste just as good as name brands and are sometimes even better for you!). However you manage it though, living within your means is the best way to avoid slipping into bad credit and having debts mount up around you.
If, however, you're already at the stage where debt is starting to mount up but you haven't slipped into bad credit yet, now's the time to take charge of things. For starters, don't just sit on your hands and hope it all goes away - phone up the people you owe money too and talk to them about your situation. In almost all cases, they'll be willing to listen and possibly even help by arranging a spread of payments to cover what you already owe; you won't be the first person to have such problems with payment and you certainly won't be the last. Depending on how much you owe, it might also be worth employing the services of a debt management company. Such firms are dedicated to helping people with debt problems, no matter how bad they may be, and can often help organise all your debts into a single affordable monthly payment, helping relieve the pressure that debt can put on you. Of course, you still have to keep up these monthly payments but once organised, they're usually low enough to give you a little breathing room with your finances.
Finally, if things get really out of hand and you end up with bad credit on your record, then the important thing is to fix your credit rating as soon as possible while also dealing with your debt. Again, this could be done through a debt management company or, if you want to go it alone, controlled use of a Bad Credit Loan (which can give you enough money to clear all your debts, but comes with a higher rate of interest than traditional loans and still requires regular payments). If all else fails though, the only options left would be either to take out an IVA - an Individual Voluntary Arrangement, which is legally-controlled form of debt management with severe controls over it - or to declare yourself bankrupt. While both have their own appeals, they also have serious consequences on your credit history since such decisions remain on your record for a minimum of 6 years, making it hard for you to apply for credit elsewhere despite essentially being debt-free. As such, these methods should be considered as a 'last-ditch' option and only be undertaken in extreme circumstances.
In Summary
Bad credit debt...
Isn't the never-ending cycle that it appears to be! Can happen to anyone, not just those with lower incomes Could prevent you from securing loans or other forms of credit Is escapable through careful control of your finances May eventually require debt management, a Bad Credit Loan or more drastic means to get out of Must be managed properly to prevent your circumstances getting worse
Copyright: Individual Finance, 2010
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