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Thursday, 6 January 2011

Dealing with Debt in 2011

Money is usually tight at this time of the year, now that the credit card bills are coming in. UK figures suggest many of us will turn to illegal loan sharks to tide us over, as bank lending has tightened. Illegal loans in 2009 are estimated at £120m, extracting c£450m repayments - that's an APR of 375%.

Despite our reputation for financial shrewdness, Scotland is apparently a hotspot for this activity. Scottish Government figures suggest 85,000 Scots are likely to use loan sharks - that's 1.7 in 100 people. There are known cases where vulnerable people have been charged 25-30% a week. That's an APR of over 10,000,000% thanks to the startling effect of compounded interest. This would mean a £100 debt escalates to £11 million in just one year if left unpaid!

As a former personal finance and small business finance writer (I had a regular column on an IPC magazine for over 10 years), I wrote two personal finance pieces on getting out of debt that got particularly positive feedback. I thought this was a good time to share the key points and update them. The articles below address both ends of the spectrum. At the front end: turning a creeping lack of money control around so you can start saving without too much pain.

If it's too late for that, the end piece has tips for dealing with a spiralling debt crisis.

So, for those wanting to end 2011 with their finances in much better shape, read on.

Debt is big business, but it's turning nasty. Even legitimate lenders are offering rates that I've not seen before on TV screens - ads with three-figure APRs in very small print. That's bordering on loan shark rates.

No doubt the companies involved will argue that:
a) their products are not meant to be a longer term solution
b) they are operating in a high risk lending area and the rate is related to the risk
c) they are providing a much needed service - and can point to the numbers using their service as proof
d) they are complying with all legal and regulatory requirements

But loan sharks could argue the same, with the exception of the legality.

All I can say is that I am worried that the numbers using these service must be high to justify paying for the current TV ads. But I'm not convinced that people have fully explored all the options before signing up to such horrendous interest rates. I doubt if they even notice the ridiculous rates they are paying, given the smooth way these short-term loan arrangements are presented. Yes I know that it's not hidden. It's in the small print, it's legal, and that people should not borrow irresponsibly. But the lenders know full well that people focus on what they want to see.

I think three-figure APRs openly advertised are a signal that it's time to act on creeping debt!

Cheaper Credit?

Keep in mind that small loans from credit unions and personal bank loans are the cheapest sources of credit after the bank of mum and dad or mates bank. Bank loans may be harder to get, but not all banks are in a pickle. Banks in Spain such as Santander avoided a lot of the financial problems. Do shop around in earnest as some banks are lending and you only need to find one.

Look out for cheap individual loans for unavoidable expenditure. For example, you might be able to get a loan from your employer to pay for a work-related expenses, such as a car, a bike or a train/bus season ticket to save money on the commute to work and other travel.

Or a genuine 0% interest loan to spread the cost of a necessary purchase.

Join a credit union to get very cheap small loans and help others.

Every little victory in the race to reduce reliance on high interest debt is worth taking and in combination, they add up.

Finding Ways to Save Money

If you are constantly caught short, now's the time to look at exactly where that money is going. Get a real handle on your money using the Where The Money Goes checklist below to pick up forgotten money drains.

Painful cuts are temporary: developing habits is a lasting solution.

Depending on the situation, you may have to apply some pain in addition to working on your spending habits. If you need to take action, taking it will improve your position immediately and you'll feel better.

The checklist will help you to spot areas where you are spending surprising amounts unnecessarily.

Then go one step further and work out how much you spend in a year on each relevant item on the list. You will probably find more items that seem unnescessary when you look at their annual cost. Knock a few of these on the head or drop the spend frequency and the potential annual savings can be surprising. There are some tips underneath the list below.

Know How Much You Need Each Month

It's usually easier to make an annual spending estimate from your credit card and bank statements, plus known cash habits. Then divide by 12 for your average monthly spend. Armed with that monthly average, save any excess in lo-spend months to cover you for months where annual premiums and other bills cluster, plus the heavy spending months around xmas and holidays.

If lots of bills and birthdays cluster in certain months, don't rack up more debt. Take action to spread the load by changing to quarterly or monthly payments or alter the due month (with the payee's approval). Diary to spread the load by buying pressies over the 2 preceding months. That gives you time to look out for great value items and make more savings.

While you have the bank and card statements in front of you, have a look at their charges. These will melt when you get on top of your spending, but it's worth seeing if you can get a better deal at another bank, building society, card provider, or the post office? You can take your overdraft elsewhere - and look into claiming back excessive charges for unauthorised overdrafts - see tips.

Credit cards are expensive credit although they do offer a short interest-free period. This can be useful if you are certain that you have money coming in shortly, but beware masking an underlying problem that surfaces half-way through the month. If you have credit card debt, try transferring the debt to a card provider offering an interest-free period, but only to pay off the debt. Cut up the new card because new purchases often attract a high rate of interest on these deals - there's always a catch.

Cut up any store cards that charge more than your credit card(s).

Where the Money Goes

Food & household items
Council tax
Home heating/cooking: gas, electricity, solid fuel/oil.
TV licence
Tax & NIC
Bank & card charges
Home maintenance, including decor and furnishings
Insurance, including buildings, contents, mortgage protection, credit card protection, extended warranties, health cover, life, car, travel, professional indemnity, other
Commuting fares
Children: school/university fees, outings, uniform, childcare, activities, pocket money, savings schemes, toys, gadgets & other expenses
Car: depreciation, petrol, parking, congestion charge, road tax, repairs, car repair warranty, breakdown cover, garaging, car club, cleaning, other
Stationery (including cards) & postage
Presents: xmas, birthdays, office whip rounds
Medical: prescriptions, supplements, alternative practitioners, health shows
Health & fitness: club/gym membership, exercise classes, home exercise gear, sports gear
Hobbies, crafts etc
Holidays - including spending money and local currency
Entertainment: concerts, shows, film & music: cinema, buy/hire/download film/music, eating out
Clothes & accessories
Dry cleaning
Shoe repairs
Newspapers, magazines.

25 Tips to Save Without Too Much Pain

Once you start analysing your spending, other opportunities to save become obvious. Here's some pointers to cut back without missing out too much:

1) Check your bank statement for direct debits you thought you'd cancelled. Put an end to them by contacting the bank and the payee.

2) Don't buy one-trip travel insurance sold alongside a travel booking. The cost could often buy you better cover for a whole year! Explore your options at places like Even better: some banks offer free annual travel insurance with personal bank accounts.

3) If you're spending a lot on eating out, do you need to learn to cook a few really good simple dishes? Could you set up an informal dinner club where you swap recipes and cook for each other in turn?

4) Sign up to web-based daily deals from companies like and to slash the cost of eating out and other treats.

5) Cook enough for dinner and lunch tomorrow to save on bought lunches.

6) Use Boots or Tesco meal deals when travelling to cut costs.

7) Shop around, particularly for:
A) insurance,
B) mobile phone deals and
C) energy suppliers.
These companies tend to put up the prices each year, while offering better deals to new customers.
You could save a four figure sum by following this tip alone!

8) There's around 8-10p difference per litre on the price of car fuel in each area I've looked at. Try or to see the cheapest fuel near you.

9) Save on gym fees. The latest basic gyms are half the price (or less). They rival the fees for local authority and university gyms, which are another option.
Or give up gym fees.
Clear some space and buy your favourite machine and you'll always have it to hand and it should last for years. Mine's a Pilates reformer which cost much less than an single annual gym fee (bought through an online shopping channel). We both use it and it tones up everything. It came with a cardio rebounder (which also allows you to train for intensive sports like skiing, plus 4 DVD instruction discs.
Or just go for a walk, or run to get cardio exercise. Learn a yoga routine for flexibility. Plus buy resistance bands and research exercises for strength training. Job done on all the key exercise areas at minimal cost.

10) BOGOFS (buy one and get one free) are great if you really plan to use those veg tonight, but they are often a waste of money and food. Go for non-food items you already use regularly when you see special offers.

11) If you can resist impulse bargains, explore joining Costco for high quality branded items at big discounts, plus great deals on catering packs of ground coffee and herbs, frozen fish & meat, wines, spirits, cold cuts and cheeses.
Their deli section is excellent for parties.
Office equipment and supplies are good value and their computers come with the best guarantee I've ever seen.
Some good camera gear too, plus electrical items, books, magazines, household items, furniture and clothes.
There's not much choice between specific items because their team of buyers pre-select the best value items for members, but they pack a lot into the warehouse. Their cafe is basic but incredibly cheap - 2 can fill up for £3-4.
Xmas goods come in early so that shop owners can stock up, so it's good for buying good value pressies early and spreading the seasonal costs.
Excellent deals on car tyres too.

12) Hair colour is often on 3 for 2 offers at major chemists and supermarkets. This gives you a double savings whammy as it saves on hairdressing bills. The results can be every bit as good if you chose carefully, do the strand and skin test, avoid dramatic changes and follow the instructions to the letter. The multi-shade colourants like Nice n Easy look more realistic.
With savings of £40+ a time, adding up to several £hundreds a year, you can afford to get organised. It's worth wearing old clothes, using latex gloves (often supplied with the hair colour) and investing in disposable shower caps plus a protective cape which can be picked up for a few pounds from beauty suppliers like Sallys.
Set an alarm to ensure you keep the colour on for the right amount of time. A bonus is that you save on time as you can potter around the house doing things. Plus you don't have to natter about your holidays to people who don't care.
The conditioners that come with most hair colourants are excellent.

13) Sad to say, when you're at the cash till checking out your great deals, give your receipt a quick check. There's increasing reports of cashiers adding cashbacks to shoppers' bills and pocketing the money. It's apparently happening in supermarkets and electrical chains - anywhere there's cashback.

14) If clothes and accessories are your spending weakness and you enjoy putting the colours together, I have a weird tip that works. Start painting pictures or doing any art/craft projects that involve choosing colours! Choosing colours to work together is a creative act. You rarely see art students wearing bright colours because they have other outlets for their creativity. Yes, it is confidence-boosting to wear clothes that really flatter your figure and colouring, and fit you well. You'll save lots by refusing to buy anything unless it ticks all three of those boxes: fit, colour & flattering. But your yearning for an endless stream of clothes will diminish as you express your love for colour in other ways.

15) If being creative doesn't fully curb your clothing lust, check out charity shops the next time you want to give your wardrobe a lift. A careful look at the labels will net some good brands and the odd designer surprise find, but give it a good look in the daylight. Or think Gok Wan, and concentrate on a few new accessories to ring the changes.

16) Taking your main holiday early gets you into the sun when it's not very nice here.
Plus you can turn your heating down to frost protection level, saving on fuel when you're away.
You often get better deals out of season.
Plus it's unlikely that you'll return to find we've had better weather than you had on holiday.
It might be wise to leave it until early Spring, given the travel chaos this winter.

17) Don't buy on impulse - just take a note of the details. If you still yearn for it a week later, go back and see whether it still has the same impact. If it's gone, think of the saving!
There's always another deal, so ignore anything that puts you under time-pressure - it's the oldest sales trick in the book and it's very effective if you don't guard against it.

18) If you are a member of a chamber of commerce, a professional association, or a business club, have they negotiated deals for members to add value to your membership? There's no point in paying full whack if you are entitled to a discount or a freebie. I get insurance against tax investigations free through the Edinburgh Chamber. My accountant insists that I have it and that one freebie alone pays for my annual membership cost - and more. What could you save through your club(s)?

19) Shop for food on a full stomach, or take a list and stick to it. Supermarkets change things around to force us to wander past more stuff, increasing the chances of an impulse buy. Ever gone in for a few things and came out with a full trolley containing nothing that would make a meal? That's a sure sign of purchases that will drift to the back of your cupboards and lurk there until you spot they are well out-of date. I know a couple that have a week when they don't buy any more food until they have cleared out most of their store cupboards. They have some odd meals but they don't waste food by letting it go past the sell-by date.

20) Get paid to shop! There's various ways to do this: with credit cards that offer cash-back deals (if the interest rates are normal).
Or cash-back websites where you can claim a discount from affiliated sellers' websites.
Or become a mystery shopper, but avoid companies that charge a fee for the privilege. Reputable market research firms should pay you for the marketing intelligence your feedback provides.

21) Take action to reduce bills:

a) Go around the edges of windows and doors and stop the draughts. Shove something up chimneys, but don't forget to remove it if you light the fire (pretty wasteful as most of the heat escapes up said chimney - can you get your hands on a closed log fire instead?).
b) A remote control for hard to reach plugs behind TVs & computers will quickly pay for itself, then save the cash spent keeping them on standby.
c) Use energy efficient appliances. Did you know that some old freezers cost more to run in a year than their original purchase costs?
d) Put an energy monitor on a tumble drier plug and you can almost see the dial spin. Can you get into the habit of drying things on a line, fold-away airer, towel rails, radiator airers and/or pulley?
e) You can do away with fabric conditioner and scoops of stain remover to save on putting a load of chemicals into the water system as well as saving money. Spot treat individual stains and collar grime before washing.
f) Use ionising washballs instead of detergent and you'll save a useful sum over the year and be kinder to the environment.
g) Give up ironing anything that isn't on show to save energy - yours and the fuel bills.
h) Use energy efficient light bulbs. They may not save a lot individually but several of them produces a tidy saving.
i) Bump up your home insulation if needed - there's info on grants and help at the
j) Use a steam cleaner instead of detergents and cleaners for lots of household tasks from defrosting freezers quickly to killing dust mites on bedding, mattresses and carpets, plus shifting kitchen grime. Get one with an iron attachment and iron things quickly on hangers against a solid surface. This will also kill body odour on items that normally need to be dry cleaned. It also drives out grime and dust. If you line up a range of tasks to justify heating the water in the tank, the energy costs are much less than savings made on the cleaning materials and dry cleaning bills.

22) Books - try the library before buying. Did you know that they will buy books in for you if they are sufficiently mainstream? Takes some time, but could save you a packet on books.

23) Newspapers, magazines. Access online. Browse magazines in the library. Swap magazines with friends or colleagues. Pick up a free Metro.

24) Reduce your mobile and phone bills by signing up for savings on offer, such as free calls to designated numbers - and diary to review them every 6 months to maximise the savings.

25) Cut your cosmetics and/or toiletries bill - have a look at They apparently employ more cosmetic scientists than any other comparable company so their products are cutting-edge. They often deeply discount their own prices. They have a very wide range of anti-ageing products for both men and women. Their Skin So Soft range has a reputation amongst walkers and climbers in Scotland for keeping the dreaded Highland midge at bay. If you like their products, you might consider becoming a rep and earn enough to have free cosmetics for life (and more!).

Once you've used the list and tips to cut your spending, that's your debt busting and/or savings started. Are there any tips you can add to help others?

What If It's Already Too Late?

If the situation is dire, look at ways to make some extra money:

i) Have you got lots of books you don't need? Why not sell them on Amazon Marketplace?
ii) Gear you don't need? Set up a wallpaper paste table at a car boot sale (with a friend so you can spell each other for breaks).
iii) Or sell stuff on eBay?
iv) Can you make a good case (in terms of adding value to your employer's business) for gaining a rise? Or a promotion at work?
v) Does anyone owe you money? Explain your circumstances have changed and you need it back - agree a gentle weekly or monthly repayment scheme paid straight into your bank account if they're hard up. Many people don't get round to repaying loans from friends and family - make sure that you're not compounding your problems by being a soft touch.
vi) If you run your own business, could you let out office space or storage space (subject to your insurer and landlord's agreement)?
Review your credit policy and collect interest from late payers - see how at
Look at how to re-package your offerings and launch deals for specific niches inexpensively using free press releases plus social media and networking (see PHPR's free downloads for tips on releases at
vii) Could you let out a room? Or your garage?
viii)Or offer a catered holiday let in part of your home?
ix) If you live near popular events like the Edinburgh Festival or The Open golf, could you store your personal stuff, stay with family or friends and rent the house out (remember to tell your insurers or you will invalidate your policy)?
x) Or have a foreign student stay for the summer when they attend a language course?
xi) Do you have skills you can sell locally? Put leaflets through doors and notices up in newsagents and on community noticeboards (on and off-line), plus tell all your neighbours and friends. Go to local events and chat to people.
xii) Can you make things for sale? E.G Sell photos online? Craft-work?
xiii) Sell expertise on
xiv) Sell spare hours on
xv) Are you eligible for any support payments? Have you claimed all that you are entitled to?
xvi) Do you have any dormant funds lying about in old bank accounts?
xvii) Foreign currency left over from holidays to cash in?
xviii) Could you use your car to deliver stuff (but you must clear it with your insurers)

You may be liable for tax on some earnings so keep money back for that.

Avoid companies that offer to repair your credit rating - there's nothing they do that you can't do yourself, but they may try to consolidate your debts into a single loan that puts your house at risk.

Also avoid fee-based debt advisers and anyone who offers to consolidate your debts into one loan, secured on your house. Your home probably wasn't on the line before then, and it's not worth taking the risk just to tidy up the admin involved in dealing with a few creditors individually. It's certainly a lot easier to deal with them if you still have a roof over your head!

For free advice, go to the Citizens Advice Bureau (major town centre CAB branches usually have more advisers and resources) and they will help you negotiate manageable payments spread over a longer period with your creditors. It's called debt re-scheduling - countries do it all the time! It works because most of your creditors would rather have their money eventually than pay a fortune to go through legal proceedings. However, there are a few exceptions, like council tax and TV licence fees that are non-negotiable and could land you in a lot of trouble, so get help from the CAB fast if they are pressing.

You must speak to people you owe money to: even the taxman has been known to offer an extended deal. No communication from you is a recipe for disaster as creditors will start down the legal path.

Explore borrowing from family and friends, but implement drastic spending cuts in order to repay the money as soon as you can. Your nearest and dearest get hit by money crises like anyone else when something breaks down unexpectedly. It's unfair to leave them without their hard-earned safety net and you risk damaging vital life-long relationships.

Another source of low cost money is a credit union, but you have to prove your worth first, so it's not a short-term quick fix.

Contrary to expectations, cutting down to absolute survival basics makes you feel better. You are taking control and it's obvious that spending less will improve the situation.

To put your efforts into context: almost every item of expenditure is an optional spend, and many items we use today would have been luxuries or unthinkable, even to aristocrats and royalty, 100 years ago.

As my granny used to say: "if you can make soup, you'll never starve". She had a point.

The Motley Fool website has a good money advice forum and further info.

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posted by Penny Haywood Calder at


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