How To Get Out Of Debt
In the UK, millions of people are in debt. If you’re one of them, don’t panic. There are steps you can take to get your debt under control.
The average person in the UK owes more than £25,000. If you are worried about your debts, don’t panic. You aren’t alone, and there is a lot you can do to improve the situation and get out of debt.
Work out what you owe
The first step to sorting out your finances is understanding what position you are in. This means making a list of all your debts. You need to include:
- Who you owe
- How much you owe
- What the interest rate is
- What you repay each month
- When you are meant to repay the debt
This needs to be a full list of every debt you have, so get out your paperwork and make sure you include:
- Credit cards
- Phone plans
- Store cards
- Buy now, pay later deals
- Car financing
This will be the worst part of the whole process. Seeing exactly how much you owe in black and white can be scary. But knowledge is power, and once you know what you owe you can draw up a plan to start chiselling away at those debts.
Make a budget
Next, get a clear picture of what money you have coming in each month and where it goes. Write down your monthly income and then list your monthly expenses, not including your debts. This should include essentials such as food, utilities, petrol and other travel costs, rent or mortgage, as well as your discretionary spending (that is, whatever you spend on yourself, like clothes, entertainment and nights out). If you need help, the Money Advice Service and Citizens Advice have online budget planners.
Once you’ve got your budget, you can see how much money you have left each month to put towards your debts.
Reduce your household bills
It is likely you will have to reduce your discretionary spending, but you can also give yourself more money to repay your debts by cutting how much you spend on household bills. You could save over £300 a year by switching your energy supplier, according to Ofgem.
While you are at it, check to see if you could be paying less for your internet, television and mobile phone. Also, make a note of when your insurance policies – car, travel, home – are up for renewal and shop around for a better deal when the time comes.
» MORE: Compare home insurance policies
Ask: Which debts are better to pay off first?
Now you need to prioritise your debts to work out which ones you should focus on repaying. Top of the list is your mortgage, if you have one. Fail to pay that and you could lose your home, so make sure you have enough in your budget every month to make your repayments on time.
After that, order your debts by interest rate, with the most expensive debts coming first.
Try to cut your interest rates
One way to reduce your debts is to reduce the interest you are paying on them. This will mean the debt grows more slowly, giving you a greater chance to pay it off. There are a number of ways you can do this depending on the type of debt:
- Credit cards: Look at getting a 0% balance transfer credit card and moving your existing credit card debts onto it. This will give you a period of time, usually a year or two, to clear your debt without any interest making it grow.
- Personal loans and overdrafts: You could get a 0% money transfer credit card and move money from your card into your current account to pay off your loans or overdraft. You’ll then have a number of months or years to clear the debt before any interest is charged.
- Mortgages: If your initial mortgage deal has ended and you are on your lender’s standard variable rate, it is time to remortgage. You may find you can move onto a mortgage with a lower interest rate and cut your monthly repayments.
Before you apply for any new products, make sure you check your credit rating. The higher your credit rating, the more likely your application will be approved and you will get the lowest interest-rate deals or longest 0% transfer periods.
If your credit rating is poor, read our guide on how to improve your credit rating to increase your chances of getting the best deals.
Talk to your lenders
If you are worried you won’t be able to make the minimum repayment on a debt, speak to the lender. They should try to help and can set up a repayment plan if necessary.
Not speaking with your lender then missing a payment can seriously impact your credit rating, so it is important to speak up.
» MORE: Learn about good credit scores
If you are still struggling with your debts, get expert advice. StepChange, National Debtline and Citizens Advice can help. You also may find that a debt management plan could help you get out of debt.
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