How to digest your January debt

Caroline Maddenoffers some tips on how to crawl from the financial wreckage of the Christmas spree.

The new year has been rung in and the festive season has drawn to a close but, for many people, the ghost of Christmas past will continue to haunt them for quite some time yet.

Like the after-effects of too many mince pies, mulled wines and champagne toasts, there is no quick fix for the inevitable financial hangover that follows overindulgence in the lead-up to Christmas.

Easy access to credit enables consumers to achieve temporarily the lifestyle to which they aspire, and for many people the temptation - and pressure - to splash out extravagantly on the "perfect" Christmas proves overwhelming.

A poll carried out by the Irish Financial Services Regulatory Authority showed that almost a quarter of consumers were planning on covering Christmas expenses with credit cards, while a further 8 per cent intended to take out a loan.

Unfortunately, the adage "act in haste, repent at leisure" rings particularly true when it comes to Christmas credit.

It is frighteningly easy to max out a credit card or exceed an overdraft limit in a single frenzied shopping spree, and paying back the money owed is always a disproportionately painstaking process.

Even in the closing months of 2007, many credit-card holders still hadn't managed to clear their debts from Christmas 2006 and they will now find their financial difficulties compounded.

So what can people do to ease their new year financial hangover?

Very few credit-card holders succeed in paying off their credit-card debt in full as soon as the bill pops through their letterbox in January.

However, with credit cards typically charging in the region of 16 per cent APR (annual percentage rate of interest), and store cards charging up to 18 per cent APR, these are extremely expensive forms of debt.

Even if you can't meet the entire balance, try to pay off as much as possible. It may only scratch the surface but the more you clear off the debt, the less interest you will pay overall.

Don't fool yourself that paying the minimum amount each month is sufficient - it may keep the wolf from the door, but the balance owed will not reduce and you'll never be debt-free.

Consumers should also consider shopping around and switching to another credit card which offers a low - or even no - interest rate on balance transfers.

The Financial Regulator points out that in this situation, consumers should make a point of trying to pay off the debt before the end of the low-interest period. It also highlights the importance of cancelling any old credit cards to avoid owing money or paying stamp duty, on both.

A credit-card cost comparison tool is now available on the Financial Regulator's website - www.itsyourmoney.ie - together with tips on how to sort out post-Christmas debts.

"If you do overstretch yourself at Christmas and you are dreading your credit card bill or bank statement, draw up a plan for paying the money you owe - don't ignore the debt," the regulator advised last month, "and stop using your credit card until you have cleared your Christmas debt."

Resolve to stop borrowing and avoid using credit cards for day- to-day spending. Instead, try to pay for purchases in cash. Ask yourself whether you can really afford an item if you haven't been able to save up to buy it.

The situation becomes more difficult where individuals have been juggling multiple credit cards and loans for months. At this time of the year, it's particularly hard to keep all the balls in the air.

One option for those struggling to cope with expensive debts is to consolidate all loans into one low-rate personal loan or roll them into their mortgage.

"If you have a number of high-interest loans," the regulator says, "you may find it is cheaper to pay them off completely by taking out one low-rate loan, such as a good value personal loan or a top-up loan from your mortgage lender."

However, you should be aware that while the monthly repayments will fall, the consumer can end up paying more interest in the long-run if the term of the new loan lasts longer than that of the original loan.

"You will not save as much money if your new loan stretches over a longer term and, in fact, a debt-consolidation loan could actually cost you more than your original loans if the term is too long," the Financial Regulator explains.

For example, a car loan is typically repaid over three to five years.

If this is consolidated into a 20- year mortgage, despite the lower rate of interest that applies and the consequent lower monthly repayments, the individual would end up paying more because the consolidated loan lasts much longer than the original loan.

Although mortgages are one of the cheapest forms of credit, top-up loans bring their own risks.

"You should also remember that the new, larger loan is secured on your home and, if you fail to make payments, your home could be at risk," the regulator adds.

If your debts have really spiralled out of control, leading to missed repayments, irate creditors and sleepless nights, it is essential to face up to the problem.

First, don't ignore your creditors. It is important to make contact with them and explain the situation. Also don't keep your partner or spouse in the dark.

Resist the temptation to procrastinate, hoping for some kind of divine intervention. Not only will you risk damaging your credit history, but if you're struggling to pay rent or make repayments on your mortgage, you're also putting your family home in danger.

Instead, take advantage of the free advice available from the Money Advice and Budgeting Service, whose money advisers are very experienced in getting people in debt back on the road to financial health.

Those whose situation is particularly acute should let the advice service know that it is an emergency, as some offices have a waiting list but may take people on a priority basis.

A meeting with a money adviser will be arranged and they will examine your income, give advice on budgeting, help you to negotiate with creditors and prioritise debts, and help you decide on a payment plan.

Finally, anyone just about keeping their head above water after recent festive splurging would be well advised to steer clear of the January sales. Yes, the price of that flat-screen TV you've had your eye on may have been slashed by 50 per cent, but if you can't afford it, it's still a false economy.

After all, you don't want to be still paying for this month's indiscretions when Christmas 2008 rolls around.

TACKLING YOUR DEBT HEAD-ON

Tackling mountainous credit card bills and overdrafts, while also dealing with all the regular drains on your finances such as mortgage repayments, can seem like an impossible task. The Money Advice and Budgeting Service has some advice on how best to deal with debt:

1. Do not ignore the problem - it will not go away. Take action now. Seek advice if necessary.

2. Work out a budget. Calculate your total income and expenditure on a weekly or monthly basis. The advice service website (www.mabs.ie) has a budget template. Check social welfare payments and seek advice on entitlements. Be careful not to exclude any debts, arrears or credit payments. Be realistic about your basic needs for food, fuel, clothing etc.

3. Examine your expenses and see if economies can be made.

4. Inform your creditors that you are in difficulty. Show them your budget. Reputable lenders will have a reasonable view if they know your circumstances.

5. If you have come to an agreement with creditors, maintain it without fail. If a creditor does not accept a reasonable offer or repayment, seek advice from your local money advice service office.

6. Do not ignore letters, reminders or default notices.

7. Always attend court hearings and bring a copy of your budget.

8. As a general rule, do not borrow more money to pay off existing debts. It increases your outgoings and delays dealing with the problem.

9. Your mortgage or rent is a priority debt. Problems with mortgage repayments occur all too easily and arrears can grow very quickly. If in difficulty, you should contact your mortgage provider immediately. Remember that your home may be at risk.

10. Your home cannot be repossessed except by court order. Lenders prefer not to repossess - it costs them time and money but, in some circumstances, they have very few other options open to them. Before legal proceedings are considered, your lender will write asking you to make arrangements to bring your payments up to date. Be realistic with your lender and try to put a plan of action in place that is practical for you.