Budgeting with bad credit
When people have bad credit; managing finances can be very difficult - trying to juggle the household bills and keep the creditors happy with as much as you can afford. Many people we have spoke to either "rob Peter to pay Paul" or cut right down on household necessities such as food and heating which is not good for you, your creditors or your future financial position.
We hope to give some helpful hints and tips to help you put your finances back in order.
People often end up living from day to day or week to week when they have bad credit - paying their creditors are sometimes put above the needs of their mortgage and household bills such as food as the pressure from the creditors mount. We have spoken to a number of clients who have mortgage arrears but their creditor arrangements have been maintained. This is normally because the creditor or, in the majority of cases the debt recovery company will 'shout' louder then their mortgage lender and thus ends up getting paid first. The mortgage lender may telephone and send letters but they are will generally be more polite than certain debt recovery companies and, due to their regulated status and their client etiquette will normally not pressure the client as strongly as the debt recovery company until its time to take legal proceedings if the arrears on a mortgage continue.
What's the first thing you should do when budgeting with bad debt?
This may seem obvious but people easily feel overwhelmed by everything they have going on and the obvious isn't always so clear - the first thing you should do is take stock of your financial situation by listing all the money you have coming in and all the money you have going out. When we suggest listing everything, we mean everything from child benefit to the part time job on a Saturday, absolutely everything. The same for money going out, list everything from the money you spend on the newspapers at the weekend to the rent or mortgage payments.
Why list absolutely everything? so you can actually see where every penny of your money is going in black and white, writing things down can give a clearer outlook as opposed to working things out in your head. If you do not know everything you spend try taking a little note pad with you for a couple of weeks - jotting down everything you spend when you spend it - this may seem tedious and a waste of time but often we find that people just don't know where their money has gone, they're on good wages but just can't figure out where it all goes. Listing everything down this way will not only let you know where your money is going but it will help when dealing with your creditors.
Budgeting with bad credit - what next?
Next we need to break down the list of monies in and monies out you made earlier.
Lets start with the monies you have coming in, before you separate the list it might be a good idea to gather any paperwork you have relating to money coming in (such as tex credit forms or wage slips) so you can get as true a picture as possible. Break your income down in a logical manner. Before you start working out what you get in and from where, its best to calculate everything on a monthly basis as that's usually the best way to pay creditors, and you also have less physical payments going out each month opposed to working everything out weekly.
Working with your Wages and bad credit
Work these out based on your take home pay, not your gross salary. Break the wages down to basic salary, overtime, bonus's etc - use your wage slips, if your wage slips vary then list each section down for the previous 3 to 6 months and see what's altering (does your overtime differ or is it your bonus altering each month - we will assume your basic stays the same).
You can then work out an average for your overtime, bonus's and your basic salary would more than likely remain the same (to work out the average for 3 months overtime, simply add 3 months overtime payments together then divide by three, that's your 3 month average).
Tax Credits and bad credit
When people talk about tax credits they usually add all the tax credits up and use that figure for working out incomes. You will need to separate the child tax credit from the working tax credit and list them down separately. That will give a much clearer picture both for you and your creditor (we will discuss your creditors later on)
You may have other monies coming in but you get the idea, break everything down into a monthly income - the more detail the better.
Next breakdown what you have going out
The outgoing list is equally important and needs to be just as detailed. This list will itself be broken down into three separate sections - living costs, priority debts and disposable income.
Living costs
These include everything from rent / mortgage payments, council tax, gas, electric, travel to and from work, food, TV licence, kids school dinner money, clothing allowance (this is probably zero at the moment but if your kids need a new pair of shoes the money has to come from somewhere so its best to allow a budget for it). Literally everything you spend on living (do not include any debts in this list). If you have pets don't forget pet food and if you smoke, you should make an allowance for this also (although giving up would save you some money!)
Priority debts
Priority debts are debts that, in the eyes of the law are of more importance than other debts, among others, these typically include
- CSA arrears
- council tax
- rent or mortgage
- court or magistrates fees
- Hire purchase agreements.
These will generally need to be prioritised before any other debts.
I've worked out my income and essential outgoings - what next?
Work out your disposable income. Simply subtract one from the other - take your outgoings away from your income and, in theory that's how much you can pay to all your creditors each month. If what you should be paying your creditors each month is more than the disposable income you have either calculated the figures wrong or are in need of help immediately as you simply do not have enough coming in to pay your normal creditor agreements.
From the first list you made you will have some items left over (such as entertainment) which you could realistically include in your outgoings but the point of this exercise is to see how much you can afford to pay to your creditors, that will in most cases mean changing a few things if you can not meet the creditors normal monthly payments - if things were ok the way they were your wouldn't need help budgeting for bad credit!
Take a moment to go through what you have not included in your expenditure and you may see where the money is going - then again you may not, you might have included everything in essentials as you have already cut down on things.
The lists need putting down in a format your creditor will understand and accept - this is called an income and expenditure form which you can downloaded here, the reason for listing things out the way we suggested above was to give you a real eye opener and allow you to put things into perspective.
How much should I pay to each creditor with bad credit?
After you have your disposable income you can work out how much to pay each creditor on a pro-rata basis, which simply means the person you owe the most money to gets a proportionately higher amount than the creditor you owe the least money to.
Working out which creditor has which share of the total debt is fairly easy. You simply add the total amount owed to all your creditors then divide the amount you owe to each creditor by the total, then multiply by 100 to get that creditors percentage of the total debt.
For example:
If you owe a total of £11,000 to all your creditors and one of those creditors is owed £3,200. You would divide £3,200 by £11,000 then multiply by 100 to show what percentage of the total debt you owe that creditor.
You then allocate that percentage of your disposable income to that creditor (take your disposable income, multiple it by the percentage number then divide it by 100)
This can then be offered as payment to your creditors. Its a good idea to let your creditors see how much you owe to the other creditors and the offer of payment being made so they can see you are working it out pro-rate.
If the creditor will not accept your offer or payment (they can't legitimately refuse to accept any payments from you but they can refuse to set up a new payment agreement for the amount you offer) or you do not want the bother of dealing with your creditors then you need to speak to a professional debt management company or similar company offering debt help , their are also various debt charities available who can help you work out the above calculations but you will still have to deal with the creditors yourself.
If you would like a professional debt management company to deal with your creditors on your behalf, slimly fill in the form in the top right of this page and we will call you back to discuss your situation in person.
