Overwhelmed by your debts? Here’s your first step

Inflation may be slowing but many of us are still feeling the pinch in real life as we head into Christmas, the busiest time of year for our bank cards.

Research from the Competition and Consumer Protection Commission (CCPC) suggests Santa’s belt might be tightening this year with the average consumer spend on Christmas expected to hit €1,030 this year compared with €1,186 in 2022.

The survey also found that nearly one-third of consumers (29 per cent) intend to use “some form of borrowing” to cover Christmas this year, up from 24 per cent a year ago.

It’s not hard to see why. The cost-of-living crisis along with rising rents and mortgage repayments means many households struggle to have anything left over at the end of month. Relying on credit “to get through” Christmas and all its expectations might seem more tempting than ever.

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While using credit or having debt when it’s manageable isn’t necessarily a bad thing, it can spiral into a serious problem left unchecked. Situations can change. A redundancy or an illness might reduce income. Suddenly late notices and fees are piling up.

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Interest is compounding. Then the scary letters and phone calls start. That’s when the world feels like it’s coming down on us and we’re stuck with no solution in sight. But the important thing to know is there are always options and different pathways available to make personable debt more manageable.

Know what you’re dealing with

The first thing you do, advises financial planner and author Eoin McGee is “you get a pen and paper”.

“You need to understand how big the problem is because sometimes we can just stick our head in the sand,” he said.

“Ideally, you spell out how many years you have left, what’s the term and what are repayments and what’s outstanding. Lift out everything you owe. Sometimes it can turn out better once you’ve seen the actual data rather than going with the made-up data we can get in our head – actually find out.”

This means looking beyond the minimum repayments to calculate how much interest you might be paying.

The CCPC has an excellent “clearing your credit card calculator” on its website that lets you see how long it would take to pay off your credit card if you paid different amounts instead of the minimum.

For example, according to the calculator, a credit card balance of €5,000 with an APR of 22.12 per cent with minimum repayments of €125 a month would take six years and two months to pay down.

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If the owner stopped using it and added just €50 to repayments making them €175, the repayment time would drop to three years and five months.

The calculator compares alternative credit cards to see how introductory balance transfer offers could help clear debt faster.

According to the CCPC tool, if the €5,000 balance was switched to a credit card that had a 0 per cent interest offer on balance transfers for nine months and the owner kept up the €175 payments monthly, it would be paid off four months quicker than sticking with the original card.

The calculator’s comparison section comes pre-populated with the current APRs and interest-free offers of credit cards available on the Irish market. But check conditions with lenders directly before making any decisions.

Read the fine print

The rise of buy now, pay later (BNPL) options in Ireland means consumers can purchase things they might not be able to afford now but can pay off in instalments down the track. However, research from the Central Bank of Ireland on BNPL services in Ireland released in November found “many BNPL users see it as a payment method rather than a form of credit”, the report said.

For example, one of the most popular companies is Swedish group Klarna, which offers a “pay in 3″ credit product that promises “no interest charges” and “no fees when you follow your automatic payment schedule”.

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However, if payments are missed or delayed they “may charge late fees”. Fees can apply for missing payments on a sliding scale from €3 per instalment up to an order value of €100, up to €8 per instalment for order values between €200 and €499.

Klarna says that if it is unable to take the outstanding amount on the third instalment, it may invoice the remaining amount for immediate payment or follow its “debt collection procedures where you will have to pay all reasonable costs incurred by Klarna and/or the debt collection agency”.

Meaning those few bits you bought for Christmas could end up costing you a lot more than you had planned if you don’t manage the repayments.

“The problem with it is you can have three or four buy now, pay later purchases going at the same time and, while you might be okay if you do stick to terms and conditions, when you go off piste you get hammered,” says McGee. “If you miss a few payments, it can get very messy.”

Which is concerning given the Central Bank report found BNPL users “are more likely to have taken out other forms of credit”.

McGee says consumers should be wary of how BNPL might make overspending more tempting, especially over the holiday season.

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“Nobody is using buy now, pay later to pay for bread and milk, it’s for discretionary items,” he warns. “Particularly with this Christmas, instead of waking up with a financial hangover with a credit card statement in January, this could be brought to a new level this year with people possibly paying off Christmas in instalments until the end of March.”

Figure out a strategy

If you have a few different personal debts, it can be hard to know which one to prioritise paying down first. The Mabs (Money Advice and Budgeting Service) recommends making sure you’re meeting your obligations on priority debts first like rent or utility arrears where “creditors have extra powers to: repossess property, evict you, disconnect utilities or fine you”.

Then, when considering debts like personal loans, overdrafts and credit cards “there are two ways of tackling things”, according to McGee.

“For people not in major trouble, there’s the traditional route of sticking all the different loans in the spreadsheet and if you are making payments as required you need to identify some additional extra cash from ways like cutting back on something or changing companies for cheaper bills,” he says.

It doesn’t matter how small the savings might be because “doing something is better than nothing”.

From there, “it might make the most financial sense to take the most expensive one first” and make larger repayments on it using the extra cash.

But McGee says while it makes sense on paper, this approach “doesn’t always work on humans” because the process “feels too slow”.

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“If I go after the lowest-hanging fruit and I’m paying €100 off a credit card, I might be able to pay that off in a few months with the extra €50 I identified. Then with the €150 you’re used to paying, you go after the next-hanging fruit,” he says.

“You can get a quick win and once you clear a loan you take money from that first loan and the extra money and you go after the next one – I’ve had much more success doing it that way.”

Know where to get help and what’s available

If you are feeling overwhelmed, there are an array of services to help you with your debt.

From the free Mabs service to the Abhaile scheme for mortgage arrears support to the Insolvency Service of Ireland (ISI) – an independent State body that helps facilitate individuals and creditors to come to an agreement when debts can’t be repaid.

“High street banks are much better at dealing with people who have fallen into arrears than they were 10 years ago,” says Michael McNaughton, director of the ISI.

The ISI helps put people in need in contact with personal insolvency practitioners (PIP) who can act as a go-between.

“What a PIP does is step in between creditors and the debtor. They negotiate, get all the info from debtors about their financial situation and then will intervene,” he says.

“They act as an intermediary between creditors and the debtor to try to find the fairest solution and they are regulated by us.”

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PIPs can charge fees depending on whether clients qualify for vouchers through the Abhaile scheme. However, for those with serious unsecured personal debts under €35,000 including credit card and utility bills a Debt Relief Notice (DRN) may be a possible option if they have little to no disposable income or assets.

A DRN can be obtained through a Mabs-approved intermediary for free if they meet the criteria and is a formal legal notice from the court stating that you cannot pay for debts. It incurs a supervision period of three years.

One of the benefits of a DRN, McNaughton says, is that it can involve applying to a court for a protective certificate (PC).

“It provides protection from creditors, it obliges them not to contact you for a period of time so no more letters or phone calls,” he says. “It cuts stress immediately. They have to stand back while that PC lasts for 70 days initially so the PIP has 70 days to draw up a proposal that considers the creditors’ and debtors’ point of view.”

The main takeaway from those struggling with debt is to start talking because hiding away will only make it worse.

Where to go for help managing debt:

MABS Mabs.ie

Backontrack.ie

The Competition and Consumer Protection Commission Ccpc.ie