A Little Bit Richer

Voiceover: This series is brought to you by L&G, helping you build a future that's a little bit richer.

Iona Bain: Hello, I'm Iona Bain, and welcome back to A Little Bit Richer, the podcast helping you feel more confident about your finances, brought to you by Legal & General. Debt is an unavoidable part of modern life, and most of us will accumulate it at some point. Yet, it's one of those words that makes us feel instantly uncomfortable. With student loans, mortgages, overdrafts, and credit cards, the ways to get into it are endless. While debt can be considered a normal part of life, without the right knowledge and careful management, it can fast spiral into something more serious. Today, we're diving into the subject of debt to talk about how easy it is to get into, how to manage it, and how we can recognise when it's becoming a problem. Joining me to discuss all this is Vikki Brownridge, Chief Executive of Debt Charity, StepChange. Welcome to A Little Bit Richer, Vikki.

Vikki Brownridge: Thank you.

Iona Bain: To kick us off in 30 seconds or less, can you tell us why it's so important to talk about debt, even if it's not something that affects you? Okay, I'll start my timer now.

Vikki Brownridge: Everyone at some point in their life is likely to use credit to help them purchase a car or something like that. What tends to happen when people fall into problem debt is something tips them over to make it unmanageable. That can happen to anyone at any point in time. What's really important is that you reach out for help if that happens to you, because the sooner you get help, the more options there are available to you.

Iona Bain: That was a really excellent summary in that time. Thank you for starting us off with that. I want to talk about debt as an emotional problem because I think for a lot of people, it can lead to anxiety, shame, avoidance. Talk us through how carrying debt can really affect somebody's mental health and what impact this can have on their quality of life and their peace of mind.

Vikki Brownridge: A lot of people that come to us also have mental health or anxiety issues. In fact, it's just over half of the people that come to us for help have that additional vulnerability. Debt can be a symptom of or a cause of mental health and anxiety. It's so important to talk to people if you're struggling or experiencing difficulty and reach out for help. So many people say to us that after they come to us, a massive weight was lifted off their shoulders.

Iona Bain: If anybody watching or listening has maybe had some issues with their mental health, is debt something that they should be aware of and maybe alive to as a potential risk in their life?

Vikki Brownridge: Yeah, I think it's really important to be conscious because spending can sometimes be a coping mechanism for mental health challenges and difficulties. But if you are starting to feel like that, stop, take a step back, check if you're going to be purchasing something that it is affordable and actually seek help from professionals and individuals if you can feel a link yourself.

Iona Bain: You don't have to struggle on your own, that's the message.

Vikki Brownridge: Absolutely not. There are plenty of organisations who can help both with the financial difficulties, but also with mental health challenges as well.

Iona Bain: Let's talk about newer forms of debt that may be particularly problematic. For example, Buy Now Pay Later, it's making it much easier for people to buy things, especially online, but it is also potentially making it easier for people to rack up debt. Is it harmless? Is it something that could really turn into a problem? How do you know when perhaps you have tipped into that state of it becoming an issue in your life?

Vikki Brownridge: Buy Now Pay Later can be very useful if you're spreading payments of a large cost item over a period of time. I think clear warning signs is if you're starting to use Buy Now Pay Later for paying for essential living costs or day-to-day costs, that's really where potentially your budget's out of control, and you're not managing your finances as appropriately as possible or as easily as possible. Again, it's important to reach out for help. Buy Now Pay Later is also, just this year, actually, just in July, been regulated and is now part of the consumer credit market, which should mean that things are better for people who start to struggle.

Iona Bain: Does that mean that if you are applying for Buy Now Pay Later, it may be that little bit more difficult to be approved?

Vikki Brownridge: There will be more affordability checks that take place, yes. It needs to be proportionate to the level of borrowing, but there will be more checks. Equally, there will also be more expectations on those organisations to support should you get into difficulty with those debts.

Iona Bain: That could be a good development insofar as people are used to borrowing on credit cards and having regulations in place to make sure that they don't get into too much difficulty. Are you hopeful perhaps that now that Buy Now Pay Later is coming under that same framework, that maybe we're going to see a reduction in some of the problems that we've seen?

Vikki Brownridge: Yeah, absolutely. Particularly where individuals have multiple Buy Now Pay Later arrangements in place, we would like to see that that is controlled better through the regulation.

Iona Bain: Let's talk through the way that you handle both good and bad debt. How does that affect your credit score over time?

Vikki Brownridge: Over time, obviously, if you are not making payments or making reduced payments, then that will reduce your credit score. If your credit commitments are very high compared to your income, that will also impact on your credit score.

Iona Bain: Can you talk us through maybe the most important factors that perhaps go into determining a reasonably good credit score?

Vikki Brownridge: Keeping up with payments is obviously really critical to keeping your credit score. The level of debt versus your income, and also, similarly, the amount of debt within the facility. For example, if you are right up to your overdraft all of the time, then that's going to have an impact on your credit score as well.

Iona Bain: Because it maybe shows that you're pushing the limits and therefore a bit vulnerable.

Vikki Brownridge: Exactly, yeah. It shows that you're probably not actually managing that debt, you're just maintaining it where it is. Persistent debt would probably also have an impact. For example, if you only ever pay your minimum payment on your credit card every month, you're not actually clearing a great deal of the balance. You're predominantly just paying interest. Again, if that is the case, that is quite a sign, and you'll probably find that your lenders will reach out to you about that as well. But if you are in financial difficulty and struggling, my advice would be, don't worry too much about your credit score at this stage. Get support, get back on track, and then you can work on rebuilding once you've got to that position.

Iona Bain: Yeah, because that has to be a work in progress over time. Do you find sometimes clients are worried so much about their credit score that it makes them reluctant to come forward and get help?

Vikki Brownridge: Yeah, absolutely. There's two main reasons people state they don't get help. We know on average people wait between 12 months and 2 years to get help, and in that time period, their debts spiral and get worse. Two main reasons. One is the stigma of debt, and that's why it's so important that as a society, we start talking about financial difficulties and debt and break that stigma down. Second is, will it impact my credit score? What impact is that going to have on me? Seeking help doesn't impact on your credit score. What you then do may, but that will all be explained to you through the process if you get help and support.

Iona Bain: The point is that that should hopefully be getting you to a point where you can get through your debt difficulties in due course.

Vikki Brownridge: Absolutely, yes.

Iona Bain: How has the debt landscape changed over recent years? How has the nature of debt changed in terms of the problems that you come across?

Vikki Brownridge: It very much used to be about people struggling with overdrafts, credit cards, personal loans, etc. People still are struggling with that, but certainly the level of debt has reduced. That's really down to tighter regulation and controls around borrowing. However, what we are seeing is significantly more people struggling with their general household bills and more people in energy arrears, more people in council tax arrears, rent and mortgage arrears. That's having a broader impact on their whole situation.

Iona Bain: There may be people watching or listening who think that this might never happen to them, who think that they're not going to get into debt because it's not something that is really relevant to them. But is there a message for people who might be underestimating the risk of debt?

Vikki Brownridge: Yeah, my clear message here would be debt can happen to anyone. As I said at the beginning, most people use credit in one form or another, whether that's to purchase a car, pay for home improvements, et cetera, and that's all perfectly manageable. But the majority of people get into problem debt when a life experience happens, a change happens, whether that's redundancy or separation or illness, et cetera. We have a case study of a young lady who gave birth to a child significantly prematurely, 4 months premature, so had to stop working to look after that child. In that time frame, her husband also lost his job.

Vikki Brownridge: They swallowed up all of their savings to continue to pay their essential bills and ended up having to go into debt just to keep the roof over their head and keep things going in what was very, very difficult circumstances. They came to us, and they are now in a plan and are heading back in the right direction, both in work, and thankfully, the child's doing really well. But it's just an example of you don't know what's around the corner. Always think when you're taking out credit, think about not only can you afford it now, but could you afford it if something went wrong, if your circumstances changed? Think about the longer term as well as the here and now.

Iona Bain: Thinking about that worst case scenario, in other words, which is not something that we like to do as human beings, what should you do if you think that somebody you know and love has got a debt problem, and you feel that they don't really want to talk about it because of, as you mentioned before, the stigma?

Vikki Brownridge: I think the important thing is to offer support and show empathy and normalise it because it can happen to anyone. It's just a circumstance. I would offer support, be there for them, and also maybe do some research and point them in the direction of organisations like ourselves who can help them.

Iona Bain: Is there advice for anybody who might be at a point where they are keeping things together but aren't sure whether they need to get debt advice or not? What are the classic tell-tale signs that somebody maybe should reach out and get that support sooner rather than later?

Vikki Brownridge: A few things. If you're not sleeping at night because you're worrying about it, or it's on your mind, if you are getting to the end of payday, and you're borrowing to top up, or you're in your overdraft all of the time, anything like that, then definitely reach out for help. It's never too early to reach out for help. There's lots of things we can do, even if it's just budgeting advice et cetera. It doesn't necessarily have to be a debt solution. Also, you can seek debt advice fully online now. If you don't want to, you don't even have to speak to somebody. If you want to keep that faceless and just dip your toe in the water, put your information in, get some responses through that way, you can do it that way, too.

Iona Bain: For somebody who's been avoiding looking at their debt, maybe they don't even know the full scale of it, what are the first practical steps that they can take to really tackle that?

Vikki Brownridge: The first important thing is to do a budget. There's plenty of budgeting apps and templates and tools out there as there is on the StepChange website as well. Understand your income and expenditure before you even think about your credit debt. Are you up to date with all of your priorities? Because that's the most important thing, your rent, your mortgage, your energy bills, et cetera.

Iona Bain: These are the bills that you need to prioritise above all else?

Vikki Brownridge: Yes, they've got to be your most important priority. If you've got any arrears with those, reach out to those organisations, make sure you have an arrangement in place. Then at the end of doing the budgeting and making sure you've got enough money for your food and everything else, then how much have you got left towards your credit debts? If you've got enough to cover them all, pay the most expensive first, so those on the highest interest rates, because then you'll start to see more from your money as they get paid off. If you haven't got enough, then reach out for extra support. Really important to engage with any organisation that you owe money to. They're there to help as well. The regulation states that they must help and support you, so don't hide from it. Reach out and speak to people.

Iona Bain: That's a really important point because I think a lot of people just do not want to talk to their bank or their energy provider because they're worried that immediately the action that will be taken against them will be really heavy and will make their life more difficult. But actually, that might not be the case.

Vikki Brownridge: In the majority of circumstances, it won't be. They are there to support and they want to help. These organisations, they have partnerships with ourselves and other debt advice organisations as well. If they can see you've got broader problem, they would advise you to work with us or one of the other organisations, too.

Iona Bain: In my experience, there can be quite a lot of misconceptions as well around debt collection, bailiffs, to use that somewhat old-fashioned word, and when they can be deployed. Is it fair to say that it's not necessarily the case at the moment that you fall behind on the debt, then you're going to be subject to debt collection practices? That's not quite true, is it?

Vikki Brownridge: No, it does depend on the debt type in terms of what enforcement action is taken. But with consumer credit debt, there's a long way to go before you'd end up in that circumstance. You need to have gone, for example, through the courts before you'd end up there. Council tax collection is a little bit different, but fortunately, this year, the rules have changed a little bit in that, so there is a bit more time for you to get in touch. Most important thing is engage with them, because if you don't engage, and you're buried head in the sand, then the enforcement action can move quite quickly.

Iona Bain: It's important for people to know this before they ever get into any difficulties, because as you said, maybe life takes a turn, and you find yourself in this situation. Just remembering this advice, even if it doesn't apply right now, could be really helpful. Can you talk us through some of the most popular debt repayment strategies as well? You touched on the wisdom of paying off your most expensive debts first. Are there pros and cons to that approach versus other ways of paying off your debt?

Vikki Brownridge: You can obviously shop around for balance transfers on credit cards as an example. The only thing I would warn against as a debt advice organisation is if you do that, you mustn't rack up any further debt. You must still be paying down the debt that you've transferred. That's a really important thing. You've got to be quite disciplined if you're moving debt around. But yes, paying down the most expensive forms of credit first will enable you to pay your debt off sooner. If you are struggling to the point where you can't make all your contractual payments, then, as I say, if you come through a debt advice organisation, there are debt solutions that will enable you to pay down if you're not in an insolvency situation. Again, reach out for that support.

Iona Bain: Yeah, because that has to be a work in progress over time. When you do feel in control of your debt, what habits can you put in place to make sure that the borrowing that you do in the future is a useful tool, not an overwhelming burden, and to avoid getting back into those problems again.

Vikki Brownridge: Firstly, budget, budget, budget. Use a budgeting app. In the olden days, you used to write it down and stick it on the fridge. But keep on top of what you're spending. It's too easy these days with tapping and Apple Pay and all of those things. Keep on top of what you're spending. Look at your bank account every day, match it against your budget. That's really, really important. The second thing is if you look to borrow, look at how affordable that is to you now and in the future. Don't just think about the here and now. Think about how you're going to afford it over the course of the time to pay that debt back off.

Vikki Brownridge: Are you expecting any life changes in that time that you already know about that could impact on your ability to pay that debt off? Think about it in that context as well. The third thing is save. Saving for a rainy day is another thing that's really important. A rainy day or Christmas or birthdays. Rather than just being caught out by a few birthdays in a month, put something aside every month to make sure that you can cover those costs, and it's just easier and more manageable for you.

Vikki Brownridge: There's lots of evidence that shows that if people have £1,000 in savings, it's a huge buffer against falling into problem debt. You don't have to save a huge amount to give yourself that little bit of protection should something go wrong.

Iona Bain: All it would take is £1,000, which for some people is a lot, but for others, that is the sum of money that could be built up in a reasonable amount of time. Finally, is there a quick win that you can suggest that people can do right now whilst the kettle is boiling, and they're making a cup of tea to better manage any debt so they can have a more secure financial future?

Vikki Brownridge: I would say talk. Talk about your finances, talk about debt, normalise debt, talk to a friend, talk to a family member, reach out, because if you're not struggling, somebody else might be, or if you are struggling, somebody else probably has at some point in their life and will be able to help you and support you as well. The most important thing is reach out.

Iona Bain: It could be as simple as just picking up the phone and speaking to a friend or a debt charity, but regardless, it's good to talk. That's really good advice. Thank you so much, Vikki.

Vikki Brownridge: Thank you.

Iona Bain: That brings us to the end of this episode. We really hope this conversation has been one you found helpful and practical. If you've heard anything that could help someone you know who may be experiencing problems with debt, please go ahead and share it. I'm sure they'd appreciate it. If you'd like support for yourself or someone that you care about, we're going to put a link to StepChange in the show notes. Next time, we'll be talking to Chartered Accountant and financial content creator, Fis Martins, about how and when you should consider turning your side hustle into your main job. This podcast is brought to you by L&G. You can keep up with the show on YouTube, TikTok, and Instagram @legalandgeneral. If you've got a question, or a topic you'd like answered on the show, get in touch on our socials. We love to hear from you. Thanks for listening and see you soon.