High credit utilization, some high interest - but credit score not overly bad. How to attack debt in this situation?

Question

I presently have:

• Credit Card, £2250 balance, interest rate of 17.43%
• Credit Card, £1500 balance, interest rate of 39.9% (3.5% min payment)
• Credit Card, £2400, interest rate of 34%
• Overdraft of £1300
• Vehicle finance, car value approximately £7995, £150 pcm
• Net take home pay of around £1320 pcm

£6150 in Credit Card debt, £7450 including the overdraft.

Obviously, the high interest cards were always a bad idea - but I didn't always have a high balance on those. I was briefly unemployed (without PPI would you believe it!), booked a trip to Japan last year and had a couple of incidences of poor fortune that led to me dipping in to those cards, and they've basically been maxed for around a year now. I am currently living with my girlfriend, I am the only driver in the relationship and I pay my share of bills and food etc. as well as my own costs for things like car insurance and petrol. By the end of the month I don't have an awful lot of disposable income, and I don't have a particularly exciting social life. Servicing the interest on these cards alone comes to around £220 each month, and is something I would desperately like to reduce.

When I have initially sought advice on this, I was somehow funneled towards groups trying to sell me on debt agreements, IVAs and so on. My understanding is that these can damage your credit history, and with my girlfriend wanting to start looking at saving for a house / deposit, I am reluctant to go down any roads that would jeopardize my chances of getting a mortgage in the short to medium-term future.

There are a lot of pre-eligibility tools out there these days, and most of them seem to suggest I'm not going to get any 0% balance transfer offers.

I have enquired about loans, so that I might consolidate some of this debt, and I have applied for one with the bank that I hold my current account with. I have been advised that I was turned down on affordability grounds. On checking my credit score, I have a score that is probably better than I expected - I never miss payments or anything like that - but they say my credit utilisation is high and so on.

One option open to me at the moment is that I am coming to the end of a Ford Options agreement, meaning I could give my car back to Ford, saving on the car finance and car insurance, and I believe this would settle the agreement on my credit file? The only downside I can see is that I would have new outgoings on public transport. And while my girlfriend says she is in favour of me doing this as a starting point, I am concerned that the lack of mobility will cause us frictions and problems in future. Having a car also affords me some options and flexibility with work that suddenly wouldn't be available. Sometimes I get some extra IT work that necessitates me driving for example.

I estimate that best case, this move would give me ~£152 pcm which I could put towards paying down the credit card balances.

Obviously I am looking at belt tightening and saving money on bills and things elsewhere, but I was wondering if anyone has ever been in a similar situation and if they adopted any particular strategy in attacking this sort of problem?

Is the £1500 balance with the 39.9% interest rate the obvious starting point here?

What are the prospects for improving my credit score in say the next 6-12 months enough to get a 0% balance transfer or loan for consolidation?

Is that realistic, or am I looking at a longer term struggle?

I'd just like to have a clear understanding of when I should apply for things again, and to give both me and my girlfriend a realistic time-frame on the bigger things.

Thank you for reading, even if there's no sure-fire advice

Answer 1

You need to pay off the entire balance of 7450 as soon as possible. This should be your primary financial goal at this point above anything else. A basic structure that you can follow is this:

• Evaluate your income. It needs to increase, and you seem to agree that it can.
• Cut expenses. Then cut more. You need to put all your expenses under a harsh light. If you are not tracking them with some sort of budget, start now. Then cut again.
• Save a small amount in cash, like 1000 or maybe a bit less. This is to prevent you from going into more debt if you have an emergency expense. Do not spend this unless for emergencies!
• Place all available income onto your debt as extra payments. Start with the highest interest, especially because all your balances are very similar.
• (optionally) save up a few thousand while making minimum payments. Sell or trade in the car if possible and purchase a cheaper vehicle.
• Continue until credit debt is clear.

Is the £1500 balance with the 39.9% interest rate the obvious starting point here?

Yes, that is fine. But all the cards and overdraft debts need to be treated with the same urgency!

What are the prospects for improving my credit score in say the next 6-12 months enough to get a 0% balance transfer or loan for consolidation?

This should not be a primary concern of yours if you want to move on with your financial life. Debt consolidation will not help you achieve the goals you have described (home ownership, financial stability). If you follow the advice here, by the time you get to the point of being eligible, you may not see enough savings in interest to make it worth the hassle. Focus on the hard stuff and pay off the balances.

Is that realistic, or am I looking at a longer term struggle?

You are looking at a significant struggle. If it was easy you would not be asking this question! The length of time will be determined by your choices: how aggressively you will cut your lifestyle, take on extra jobs, and place additional payments on your debt.

By being that extreme, you will actually start to see progress, which will be encouraging. If you go in half-committed, your progress will show as much and it will be demotivating. Much of your success will hinge on your mental and emotional toughness to push through the hard work of delaying pleasure and paying off these balances.

That is just my personal experience, so you can take it or leave it. :) The credit score will take care of itself if you follow this method, so don't worry about it.

Good Luck!

Answer 2

The bottom line is you have an income problem. Your car payment seems very high relative to your income and your income is very low relative to your debt. Can you work extra jobs or start a small business to get that income up?

In the US it would be fairly easy to work some part time jobs to get that income up about 1000 per month. With that kind of difference you could have this all knocked out (except for the car) in about a year. Then, six months later you could be done with your car.

Most of the credit repair places are ripoffs in the US and I suspect it is similar around the world.

Answer 3

While paying off your debt quickly is obviously desirable it is simply not going to be possible. Even with tight budgeting I think you will struggle to put more than £500 or so per month towards your debt.

I would keep trying to move the highest interest debt onto something cheaper, be it a loan, a balance transfer credit card ( http://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards#nofees ) etc.

It is also worth looking at your current credit cards more carefully. Sometimes you may be able to get a balance transfer deal on an existing card by talking to the card issuer, then shuffle your debt around to take advantage of it ( http://www.moneysavingexpert.com/credit-cards/cut-credit-card-interest )

Some think it's taboo but in your position I would also be seriously considering if you have any friends and family who can lend you money at a less crippling interest rate.