FOOL SCHOOL
Debt Options and Tips

December 9, 2002

By Jane Mack (TMFJane)

When thinking about how to tackle your debts, you'll find you have a number of options to consider. These include getting a better deal on your credit card debts by transferring them to a low-interest rate card, consolidating the debts by getting a personal loan at the lowest possible interest rate, or even releasing some of the equity in your home by remortgaging. The aim in any or all of these options is to get a better deal so that you are freeing up as much money as possible to put towards paying off the debts.

If you're not in a position to do any of these things then it's time to prioritise.

Look at all the debts and think about which ones have the highest interest rates. Who is nagging you the most for money? Can you meet at least the minimum payment for each debt? And do you have some money to spare to feed the most voracious debt, ie: the one charging the highest interest rate?

If so -- then do it! Throw as much as you can at the most expensive debt until it's cleared while making minimum payments on the others. Then tackle the next one, and the next one, and the next one!

From a psychological point of view, some people find it easier to tackle the smallest debts first -- regardless of how much they're actually costing in interest charges.

This method does at least induce a sense of satisfaction more quickly -- and if it's the one that works for you -- then reassure yourself with the thought that at least you are doing something. However, bear in mind that it will take longer to clear your debts overall if the smallest ones also happen to be the cheapest to finance.

Time for a bit of 'carrot and stick' treatment here. First of all, here's the carrot:

And here's the stick: If you are really serious about getting yourself financially straight, it is vitally important that you abandon all thoughts for the time being of taking a holiday, getting a better car or replacing your temperamental VCR with a new one. To be frank, it's a bit disconcerting seeing someone in serious financial trouble pop up on  Debt Discussion Board asking for help -- only to spot the same person on another Board a few days later raving about a cheap deal they've just found for a long weekend in Barcelona. (Usual excuse: I've got huge debts of £30,000 -- so another £500 won't matter! And besides, I really need a holiday because I've been worrying so much recently!)

These are people who don't seem to have grasped the fact that they are actually risking the roof over their heads for the sake of a short-term 'happiness' fix! I don't blame them -- it's understandable to want to get away from it all when everything is crowding in. And, if you're the sort of person who does this kind of thing, I'm not going to beat you around the head with a cricket bat -- because I've been in exactly the same position myself in the past. I'm just trying to make you screech to a sudden stop and think!

If you're honest with yourself, you'll probably realise you're in a bit of a mess right now because the costly fun things took priority instead of the essentials. Trust me -- it's far more satisfying to pay for something by yourself, instead of borrowing it from someone else at vast expense and then worrying about how to meet the bill.

If you want the occasional treat to keep you going while clearing your debts, pick a small one such as a book or a CD. Don't forget that, when you were a child, small things gave you an immense amount of pleasure. They still can. You really don't need the expensive things.

So, if you've decided to get your act together and to tackle your debts -- then here are a few small tips on the Do's and Don'ts:

Do:

• make sure that all your scheduled payments are set up to leave your account the day after your salary is paid into it. That way you'll get the bills out of the way before you get a chance to spend the money on other things.
• consider getting a second job for a short period. You may not feel like working behind the bar of your local three nights a week but it'll mean you'll get your debts cleared more quickly.
• think about taking a lodger. Under the Government's Rent-a-Room scheme, you are allowed to 'earn' some £4,250 a year without paying tax on the income. You will need to agree this with your mortgage lender as well as your insurance company, and check how it may affect any benefits you may be receiving, but it can prove to be an effective, easy and temporary solution to immediate financial problems
• a car boot sale? It takes effort but they can be quite fun and it's a good way of getting rid of some of the clutter you've accumulated over the years. Remember to sell only stuff that belongs to you -- anything bought on HP isn't yours to sell until it's paid off. And don't be picky about the quality of stuff you sell -- some people will honestly buy anything. After all, you did!
• make sure you that, if you frequent the same supermarket for your food and petrol, that you collect your points whenever you buy anything. Over a period of a year, the loyalty points on your weekly shop can amount to enough to fund your entire food and booze requirements for Christmas! Alternatively, you may find it's cheaper to shop around. You won't have the convenience of buying everything in one place, but meat and veg is likely to be cheaper at your local market rather than the supermarket.

Don't:

• be tempted to go to a debt counselling company that charges a fee for their services -- your money would be far better used paying off the debts and the Citizen's Advice Bureau offers the same service for free.
• be tempted by offers of loans from mysterious companies in the back of national newspapers -- the interest rates are usually astronomical.
• go food shopping on an empty stomach and never go without a list of what you actually need. You'd be surprised how pushing the trolley around the supermarket while your stomach's rumbling makes you want to grab everything off the shelves. Don't miss out on the regular buy-one-get-one-free or three-for-two offers on your regular purchases either. You will always need washing powder and toothpaste after all!
• be a snob when it comes to buying clothes -- Oxfam and Save the Children are perfectly good shops and there are bargains to be had!

For more on tackling debt see our Get Out Of Debt centre.