This dilemma happens when on a very minimal budget you can just about afford the minimum monthly payments on your debts but your snowball – the amount extra you can overpay each month – is very small or non-existent so it is going to take ages to get debt free.
Use the Snowball calculator to find out how many years this is likely to be.
If the answer seems too long to live on such a restricted budget, then your alternative is probably to increase your budget to a more reasonable level (read How far to cut back? for thoughts on what this should be) and opt for a Debt Management Plan.
How long will a DMP take?
You can estimate the length of the plan by dividing your total debt by the amount you are paying each month. There are two assumptions here – first that all your creditors freeze interest and second that you are either running the DMP yourself or using a DMP company that doesn’t charge you any fees. So if you owe £10,000 and you can pay £200 a month to the DMP it will take 10000/200 = 50 months, a bit over 4 years.
This may be shorter or longer than the snowball, depending on how much you have “relaxed” your budget. But it will be more workable as the planned expenses are more realistic. You can’t live without new clothes for 5 years and if you have children, then as they get into their teens they do cost much more.
Won’t my creditors refuse this DMP?
You may be wondering if your creditors will accept your DMP if you could actually manage without one by cutting back further. That depends on the figures in your income and expenditure. StepChange have a budget calculator called Debt Remedy that provides ranges for things like groceries, medical costs etc – you could look at those and see how your actual amounts compare.
Sometimes if you are paying a fair amount to a DMP a few creditors won’t freeze interest – but if most of them do then you will still be making much faster inroads into your debt.
Setting all your budget lines to the maximum you think you can “get away with” if you would actually be comfortable to live on a bit less is not generally a good idea – it will mean that it could take a very long while to become debt free. This is especially important if you have a house with equity in it because some creditors will be happy to freeze interest for 6 months or a year but not afterwards.
Your credit rating
If your credit record at the moment is good, you should also think hard before opting for a DMP. With a good credit record, you may well be able to reduce the interest you pay on your debts. If you can get a 0% balance transfer you are effectively getting much of the benefit of a DMP without the black marks on your credit record and with no hassle from creditors or worries about getting taken to court.
If you have a mortgage (or hope to get one once your unsecured debts are gone) then a good credit record is very important as it will affect your chance of getting mortgage or a remortgage at a good interest rate. But if you are currently renting and don’t expect this to change, it is reasonable to shrug and say you don’t care about that.
One person’s story
A reader sent me this:
“My debt was mainly through credit cards which I began to use during my uni years and shortly after graduating. Their shiny marketing appeal and 0% balance transfers were all to attractive to a fun loving girl in her twenties who dreamed big and thought that my career in teaching would payback this lifestyle. How wrong I was!
By the time, I reached my late twenties, reality hit home that I had got myself in a right mess which didn’t seem redeemable at the time. Although I was making regular payments and was managing my debt, I wasn’t getting ANYWHERE in actually paying it off due to the interest rates charged.
Before I began my DMP, I literally felt at breaking point. I was also desperate to start a family but felt that I wasn’t in any position to be bringing a little person into the world when my financial situation seemed so dire.
I was diagnosed with depression and was taking anti depressants for 2 years to help me cope with the guilt and shame I felt with debt. I was able to come off these as soon as I began my DMP. It was like a weight off my shoulders having the support of Payplan.”
Give it a try but be prepared to change
Apart from the credit record issue, this choice isn’t irreversible:
- you can start by trying to snowball and then change to a DMP if you realise your budget is unrealistic;
- you can opt for a DMP and then switch to making full repayments if things improve, for example you get a promotion at work so you can afford more, or your childcare costs reduce as the kids get older.