This is part 3 of the Meltdown Monday series. You can catch up on part 2 here.

My solicitor (it still feels weird saying that) gave me a bit of a grilling about my personal finances, and how stupid I’d been to have been taken for such a ride in the first place. I think he felt sorry for me in a way, and I’m glad he said what he did. I walked out of his office very depressed, but inside me something clicked. I suddenly became very determined to beat my debt situation and turn my life around. I’ve since discovered this is commonly termed your ‘Light-Bulb Moment‘, particularly by the folks over at the money forum I frequent.

When I got home, my drive was still there to do it. I went over my bank statements again, except this time concentrating on my own spending; Every month there was hundreds of pounds of unnccessary spending of my own doing on there. Expensive organic food shopping, premium diesel, takeaways, gadgets, insurances and more. I was also paying off 2 credit cards and 3 personal loans with wildly varying interest rates, so I needed to work out what I owed and to whom. I worked up a spreadsheet (budget) of my essential spending, and vowed to cut out everything else, trying desperately to spend less than I earned. I drastically cut spending even on essentials: my food shopping allowance to myself dropped from an average of £300 a month down to just £50, my diesel average spend had to drop from £250 as that was an insane amount of money just to spend on getting to work and back.

Then, it was time to attack my debts.

One credit card I’d ignored for the best part of 3 years: it refused to work in the petrol station one morning and I buried my head in the sand from that point onwards. I assumed that as I was paying upwards of £100+ a month on it, the balance must be shrinking. Instead – after biting the bullet, phoning them and resetting my access details for online banking – it turned out I was over my credit limit and had been incurring £16 fees every month for the privilege for the last 3 years! I was also paying interest on these fees every month, so my balance was going up not down, despite my payments. £120 was taken automatically from me every month, but after £90 interest was added, £20 Payment Protection added, and then a £16 fee on top,  my monthly repayments were not touching the balance at all.

Despite this, my credit rating was still good. I arranged an appointment at my bank with a financial adviser and went down with my tail between my legs a few days later in the frigid January morning air. I’ve been with my bank since I was 12, and I honestly believe in this instance, loyalty paid off. I explained my circumstances, was brutally honest, and despite the bank earning loads off me, the lady I saw was keen to help me. She consolidated my existing loans (one at 19% APR, the other at 12% APR) into one loan at a much more preferable 8%, and said I was also showing as pre-approved for the Barclaycard Platinum card that carried a 15 month 0% balance transfer for new customers. She said it was unlikely I’d get a great initial credit limit due partly to policy and partly my existing credit commitments, but anything would be better than nothing for transfer purposes. She also made a point of saying that I shouldn’t be tempted to spend on the card, as despite it having 0% on new purchases for 3 months, the terms of the card meant my balance transfer would be paid first, meaning I’d be stung for interest on the purchases all the while any transfer remained.

Honest advice from a bank – how terribly refreshing!

I walked out instantly having saved £55 a month in loan repayments, and shaved 12 months off the term. Even better was the payment holiday the loan gave me to begin with; 2 months with nothing to pay. I needed this, as it helped me work out where I was without worrying I would end up in my overdraft again.

Shortly thereafter my new credit card arrived with a £1,000 limit. Not great, but £1,000 at 0% is better than £1,000 at 16.9%, so I transferred what I could off my old card onto the new one, and planned to pay off the remainder as quickly as I could. The other credit card I paid off and closed instantly, as it had a surprisingly low balance already. I upped my automatic payment to £400 every month, and made an immediate one-off payment to get me just under my credit limit again to stop the charges. For the first time in 3 years, my credit card balance would reduce on the next payment!

I felt terribly alone at this point. Despite having a good relationship with my family, it’s not a topic I personally feel comfortable discussing with them in great detail. I wanted to feel part of a group in my fight, and to know I wasn’t alone. I mentioned debt to a trusted friend at work and he introduced me to Money Saving Expert (or ‘MSE’ to its friends). The website is a goldmine of information, but the forums are the real feature; Thousands of helpful people from all industries, sectors and walks of life combine together to cut bills, reduce outgoings, help the environment, help each other and play big corporations at their own games. I was hooked instantly – I felt like I belonged – and with their help, I planned my way out of debt for good.

Quite arbitrarily, I set my Debt Free Day as New Years Day 2010. I knew I would struggle to meet that goal, and struggle a lot. I owed £16,000 (if I included my overdraft), or potentially £20,000 (if I include my projected divorce cost), but the difficulty of it is in part why I chose it. I work best under pressure, and it was a significant date, too. It was almost exactly a year after I moved out of my old home and back in with my parents, and it also signified a new beginning: A new year, a new decade, and a new, debt-free me.

Since that moment, I have been working every possible hour of overtime humanly possible, and saving every penny after paying off my debts according to my own plan.

Continue to Part 4…

• Beware The Balance Transfer Cheque
• Credit Card Analysis: From Hell to Heaven
• The Importance of Redundancy Planning
• 7 Reasons My Friend is Poor
• Is Debt Worth It? Does It Matter?

This is part 1 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can access every post in this series by clicking here.

I’m a regular over on the Money Saving Expert forums, particularly the ‘Debt-Free Wannabe’ area. On a daily basis, people post that they owe money, but they’ve no idea to whom, how much for, or at what rate. Before you can even begin to cut your debt, you have to know what you owe.

Priority Debts – First things first. Do you have any Priority Debts? These generally are:

• Council Tax
• Mortgage / Secured Loan / Rent
• Child Support
• Court Fines

Falling behind on these can see you homeless, sent to prison or both, hence the term ‘priority debts’. Either is unlikely though, if you make a best effort to pay back what you owe with what you have available to you. In terms of council tax, the minimum arrears payment for someone on a low income can be as little as £2.65 a week.

Once you have got your priority debts under control, it’s time to attack ‘everything else’.

Find your loan agreements – Hopefully you’ve kept them safe and accessible. These will show what you’re paying, at what rate, and when it ends. If you can’t find this then check your bank statements to at least get some idea of the monthly figure. We’ll see in a little while how to find the remaining missing information.

Find your credit card statements – or access them online. Credit cards with revolving balances are usually one of the most expensive ways to borrow money longterm, with perhaps the exception of the payday loan sharks. Interest rates vary wildly from a very good 6% up to a wild 55% and beyond, depending on your own personal circumstances and payment history.

Are you in arrears with utilities? Don’t forget to take into account any arrears with your electricity, water, gas, or telephone suppliers. These generally won’t affect your credit rating but can have much more direct consequences, i.e. disconnection.

Are you in arrears with credit companies? You need to take action right here. These will affect your credit rating, and can and will end up costing you a fortune for up to 6 years after the fact. Talk to your lenders and come to an arrangement to pay what you owe, including arrears. Ask them if they can freeze your interest, effectively turning the credit product into a fixed-term loan. Don’t bury your head in the sand over the issue, as it’ll only get worse the longer you leave it. You’ll also probably start to get harassing telephone calls hourly or daily around this point, demanding you make payments you probably cannot afford. You don’t have to take this though: demand all contact by written form in future and advise them that further telephone calls will be dealt with as harassment. Speak to one of the debt charities (CCCS are very good) or Citizens Advice as a matter of urgency.

Defaulted. Debt sold. Now who do I owe? – This is where it gets murky. If you know who you owed prior to this point, contact your old lender. They may be able to tell you who they sold the debt onto.Alternatively pull your credit reports and see where the defaults are, and who they are from. This will also give you some idea of the amounts. If it has got to this point, your credit rating has already likely taken all the battering it’s going to for this debt, so it gives you the upper hand. Your debt would have been purchased likely for pennies in the pound, so you may be able to make a vastly reduced payment to the Debt Collection Agency. They would get their ‘profit’, even though you pay far less than you originally owed. It won’t fix your credit report though, but neither would paying back the full amount.

Get Your Credit Reports – There are three Credit Reference Agencies (CRAs) in the UK: Equifax, Experian and CallCredit. These folks compile your financial history in terms of your borrowing and more importantly, your reliability in paying back. Other lenders then use this historical information to credit score your future suitability for a particular product.

The information on the files remains for 6 years from the point of settlement, so if you had a bumpy credit card ride when you were 18 and finally closed the account when you were 20 it can still affect you when you try and get a mortgage at 25! Check their respective websites for a 30 day free trial, but remember to cancel before the period is up to save paying anything. Right now (at the time of writing) Experian and Equifax offer free trials. CallCredit charge £12 for 3 months of access.

One benefit of accessing your reports is they can help fill the gaps in your lending knowledge. The CRAs will know what you owe, to whom, when the agreement started, how much you should be paying, and when those payments are due!

Knowledge is power, and once you know what you owe, you are very knowledgeable indeed.

Continue reading the Dig Yourself Out of Debt Series – Part 2 is here.

• The Importance of Redundancy Planning
• A Humble Return
• The Credit Crunch Has Positives
• Frugal Friday! 20 Ways to Cut Your Annual Vehicle Costs
• Dig Yourself Out of Debt: Avalanches and Snowflakes