How to Get Out Of Debt: A Step-By-Step Guide

Worried about how much money you owe? Support is available if you’re finding it increasingly hard to repay your debts. Read on to find out how to get out of debt and specific strategies for dealing with credit card, overdraft and loan repayments.

Ruth Jackson-Kirby, Brean Horne Last updated on 22 April 2022.
How to Get Out Of Debt: A Step-By-Step Guide

Borrowing is a common way to pay for goods and services when you don’t have the money up front. So it’s normal to have some debt. In fact, according to recent statistics from the Bank of England, the average UK adult had personal debt of £33,410, excluding student loans, at the end of January 2022. And if debt is managed well, it may not cause you any issues. But if you feel like your debt is piling up and becoming unmanageable, it’s important to seek help and take action.

There are many ways to get your repayments back on track, including prioritising your debts and speaking to your lenders. Here, we explain how to get out of debt and give specific strategies to help you pay off the most common types, including credit card debt, overdrafts and loans.

Work out how much debt you have

The first step to getting out of debt is working out exactly how much money you owe. Start by making a list of each type of debt you have including:

Then for each category, make a note of the following details:

  • Who you owe
  • How much you owe
  • The interest rate on each debt
  • Your monthly repayments
  • Monthly repayment dates

Calculating your overall debt can seem daunting, especially if you’re unsure about how much you owe. But knowledge is power, and having a clear picture of what you need to repay can help you clear your debt.

» MORE: What is debt?

Create a budget to get a clear picture of your finances

Once you know how much you owe, you’ll need to make a budget to work out your monthly income and spending.

Ideally, you need to get a hold of at least three months’ worth of bank statements and make a note of the following:

  • Income: Wages, bonuses, pension or benefits you receive.
  • Essential spending: Mortgage or rent payments, bills, travel expenses, food and childcare costs.
  • Non-essential spending: Socialising, holidays, hobbies and leisure activities.
  • Debt: Repayments for money owed through loans, credit cards and overdrafts.
  • Savings and investments: Money set aside into a savings account, ISA or investment portfolio.

Budgets help show how much money you have to work with each month. This is important for calculating what you can commit to paying towards your debt.

If you’re unsure where to start, sites such as Money Helper offer free budget planning tools.

» MORE: Calculate your debt-to-income ratio

Make a plan to pay off your debt

Having a plan of action can help you pay off your debts quickly. It’s better to tackle debt in terms of urgency rather than the size or cost of the debt itself.

This is because the knock-on effects of failing to pay some debts are more serious than others. Debts typically fall into one of three categories.

Debt emergencies

Debt emergencies are when you face legal or other serious consequences for not repaying what you owe. This includes:

  • court action
  • bailiffs or a debt collection agency
  • eviction or repossession

It’s vital to get free, independent debt advice as soon as possible if you’re facing a debt emergency. A debt adviser will be able to assess your situation and give you the most appropriate steps to take. They can also talk to the court, bailiff or lenders on your behalf to help you reach a resolution.

» MORE: Debt charities and how they can help you

Priority debt

Problems with priority debt can escalate and affect other areas of your life if you don’t take any action. For example, you might lose your home or face legal action if you don’t keep up with repayments.

Examples of priority debt include:

Non-priority debt

Non-priority debt is less of a worry if you don’t pay it off in full right away. But that doesn’t mean you should ignore it. Late or missed repayments can negatively affect your credit score and could lead to problems further down the line, such as court action.

Examples of non-priority debt include:

When paying off non-priority debts, it’s best to start with the most expensive ones first. This is because these credit agreements will charge the highest interest rates.

Try to make the minimum payment to avoid falling behind. But if you can afford to pay more, pay off as much of the debt as you can without breaking the terms of your credit agreement. This will help you clear your debt faster.

Once you’ve paid off the most expensive debt, move on to the next one until you’ve worked through them all.

Payday loans

Payday loans deserve a category of their own, given the high rates of interest they typically charge, and the onerous rates, fees and penalties that can come into play for late payment. If you're ever struggling to repay a payday loan in the timeframe that you should, contact the lender as soon as possible to discuss your options.

» MORE: Are payday loans ever a good idea?

Reduce your expenses

Reducing your spending can help you unlock extra cash to pay off your debt. So within your budget, split your expenses into two categories:

  • Essential spending: This should include rent, mortgage payments, household bills, travel expenses, food shopping and childcare costs.
  • Non-essential spending: This should include subscriptions, socialising, hobbies, leisure activities and holidays.

Non-essential spending is the easiest place to make cuts. So have a look at your expenses to see if you can make any adjustments to save money. For example, cancelling unused subscriptions could help you save hundreds of pounds a year, which can go towards clearing your debt.

Next, take a look at your essential spending. Research whether you’re getting the best deals on your household bills. Price comparison websites can be a good place to start as they can help you shop around and compare lots of deals quickly. It’s also worth looking into your council tax band to check whether you’re eligible for a discount or rebate.

You may also be able to save money on food by planning your meals and cutting costs at the supermarket.

» MORE: How to manage the rising cost of living

Boost your income

Finding opportunities to increase your income can help you pay off your debt faster. For example, you may be eligible for financial support from the government such as universal credit.

Selling used items or taking on a side hustle could also help you generate more income to help you get out of debt.

» MORE: 27 ways to make money online and offline

Tips for paying off credit card debt

Use our top tips for paying off credit card debt to help you clear your balance faster.

Start with the most expensive credit card

If you have debt across multiple credit cards, start by clearing the most expensive one first. This is usually the card with the highest rate of interest.

For example, if you owe £2,000 on one card charging 21% interest and £2,000 on another charging 35% interest, focus your efforts on paying off the card charging 35%.

Once the most expensive debt is cleared, you can concentrate on paying off the other credit cards in full. However, it’s important to note that you’ll still need to make the minimum monthly repayments on your other cards while trying to clear the most expensive debt too. Failing to keep up with them could harm your credit score and affect your chances of being approved by lenders in the future.

Use a balance transfer credit card

Some credit card providers allow you to transfer debt from a credit card with a high-interest rate to one with little or 0% interest.

These are known as balance transfer credit cards. They usually charge a one-off fee of 2% to 3% of the amount you would like to transfer. Using a balance transfer credit card could help you reduce the interest added to your debt, which may help you clear it faster.

Be sure to check your credit score before applying for one and use a free online eligibility calculator to find which cards you’re more likely to be accepted for.

Make more than the minimum repayment

Where possible, try to pay more than the minimum monthly repayment on your credit card.

That’s because minimum repayments are quite low, which means that it will take longer to pay off your credit card debt.

Sticking to minimum repayments can also negatively affect your credit score, which may limit your borrowing power in the future.

Tips for paying off overdraft debt

Use the following tips to help clear your overdraft debt.

Consider separating your overdraft from everyday banking

You may be able to set up a new basic bank account with no overdraft that is separate from your existing account with overdraft debt.

This can help stop you from using more of your overdraft for daily expenses, so you can pay it off gradually.

Try a money transfer credit card

A money transfer credit card pays cash into your bank account, which can be used to pay off your overdraft debt. In addition, some cards offer a 0% interest period. This means that you can split your repayments without paying extra interest until the interest-free promotion ends.

Most lenders charge a fee to complete a money transfer. As with all credit products, it’s really important to check your credit score and use an eligibility calculator to find which cards you’re most likely to be approved for.

Use savings to pay off your overdraft

It may be best to use any savings you have to pay off your overdraft debt. That’s because the interest you’ll pay on your overdraft is likely to outweigh the interest gained on your savings pot.

Tips for paying off personal loan debt

Use the following tips to clear personal loan debt quickly.

Refinance your personal loan

Refinancing a loan is when you take out a new loan with cheaper interest or a shorter repayment period to pay off a single existing loan debt.

Loan refinancing is particularly useful if your existing loan charges high interest or other fees that make your repayments expensive.

Be aware that you may pay extra fees for ending your existing agreement early.

Consider a debt consolidation loan

A debt consolidation loan lets you borrow money to make repaying what you owe across a number of existing loans more manageable.

The provider will agree on the amount to lend you and over what time period. You’ll then have to repay them the money plus interest. Ideally, the interest rate on the debt consolidation loan will be lower than what you’re already paying on your existing loans.

Debt consolidation loans usually charge a fee, which is a percentage of the total amount you need to borrow.

However, it is important to remember, with a debt consolidation loan you may end up extending the term of your debt and therefore the total amount you need to repay.

Speak to your lenders

Speaking to your lenders can help you get out of debt, as they may offer support.

Some lenders may agree to lower your monthly repayments if you can prove that you’re paying as much as you can afford to. These agreements are arranged directly with the lender or through a debt management plan.

You might also be able to negotiate a partial settlement with your lender. This is when you pay a percentage of the total amount of debt you owe because it’s unlikely that you’ll be able to repay the full amount.

Get free expert debt advice

If you find your debt is unmanageable, don’t struggle alone. Instead, contact a free, independent debt advice service as soon as possible for help. A debt adviser will be able to talk through your financial circumstances and help find the best way to deal with your debt.

They can also help you apply for temporary protection from your creditors through the ‘Breathing Space’ scheme if you live in England and Wales. Scotland offers similar protection through a programme called the Debt Arrangement Scheme. Northern Ireland currently doesn’t offer an equivalent scheme.

Dealing with debt can be a stressful experience and it’s equally important to take care of your mental health during this time. Charities, such as Mind and Mental Health UK, offer resources to help ensure you’re supported and look after your wellbeing.

» MORE: How can mental health affect your finances?

What to do if you can’t pay off your debt

You may need to apply for a Debt Relief Order or declare bankruptcy if you can’t afford to pay off your debt.

But remember that you don’t have to manage debt on your own. If you’re facing serious difficulty, contact a debt charity as soon as possible to help you find the best way forward.

About the authors:

Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more

Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more

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