Are you in debt? For most of us, the answer is a simple "Yes". Whether it's a mortgage, a credit card debt, a student loan, a hire purchase agreement, an overdraft – debt plays a fundamental role in modern life, and very few people can say they have no debt at all.
"Are you in too much debt?" would be a more important question – but it's also much harder to answer. Responding to this question requires a detailed assessment of your finances: not just what you owe, but what you own, what you earn, and how much you need to spend every month on everything from your mortgage / rent to your utility bills, petrol and payments to your unsecured debts.
After all, someone with a £ 10,000 credit card debt will find it much harder to cope than someone with a £ 5,000 credit card debt – but only if they're in approximately the same situation. If the first person earns a great deal more and / or has much lower expenses to deal with, they could well be in a better situation to deal with their debt.
If you're wondering whether you're in too much debt, it's good to talk to a debt adviser, who can help you go through your finances and decide whether or not your debts are a problem.
Are you in too much debt?
First of all, it's important to understand the difference between priority debts (from mortgage / rent to utility bills and child maintenance payments) and non-priority debts (everything from credit cards and overdrafts to unsecured loans and store cards).
1) Write down everything you owe – and add it all up.
- Do include all your non-priority debts.
- Don't include your mortgage or any other debt secured on your home.
- Do include any arrears on your priority debts.
- Don't include your latest bills for your priority debts – the ongoing cost of your mortgage / rent, utility bills, etc. is basically a living expense, like food or petrol, so you shouldn't include it in your calculations here.
The figure you end up with is an important figure, but it won't really answer the question until you've compared it with your income (after tax).
If it's less than 3 months' take-home pay, you're probably on top of your debts. Even so:
- it's important not to get complacent, as your debts could grow a lot faster than you realize, and
- it's still worth trying to pay off whatever debt you can, as this will mean you're paying less in interest, and
- your debt could become dangerous if your income dropped, as it would then be larger in comparison with your income.
If it's the same as 3-6 months' take-home pay, then your debts are potentially reaching a dangerous level, so:
- try your best to repay whatever you can, and
- avoid taking out any more credit – at least until you can reduce your total debt so it's less than 3 months' take-home pay.
If it's more than 6 months' take-home pay, then your debts are probably too high, so you should:
- avoid taking out any more credit, and
- focus on repaying your debt.
How can I pay off my debt?
If you feel you need to pay off your debt more rapidly than you are doing, it's normally best to focus on the highest-interest debt first, and put as much as you can afford ( if possible, your entire disposable income – everything that's left once you've accounted for your living expenses and your payments to all your debts ) towards it.
If you'd like some advice on doing this, or on any of the other points in this article, you should talk to a debt adviser.