Recent figures from The Money Charity show that household debt has reached a record £1.5 trillion and the average consumer now owes almost £30,000.
While in many cases, borrowing is necessary for most people, too much debt is expensive, stressful and can damage your credit score.
If you are concerned about your level of debt, it is possible to take control — and the most important thing is to start now. To help you manage and reduce your debt, here are some top tips to get you started.
1. Be aware
Take a piece of paper or a spreadsheet if you prefer. Write down all the money you owe, who you owe it to, and the interest rate. Then add them all up. Don’t worry if it’s a lot. The important thing is that you now know your starting point.
Once you’ve added up all your debts, it’s time to prioritise them.
2. Prioritise your debts
Go through your list of debts and categorise them into ‘priority’ and ‘non-priority’.
Priority debts include:
- Mortgage, rent, or loans secured against your home
- Gas and electricity bills
- Court fines
- Child maintenance
- Council tax
- Hire purchase agreements for essential items
- Income tax, national insurance and VAT
- TV licence
Not paying these can have serious consequences like home repossession, visits from the bailiffs, a county court judgment or even imprisonment.
Non-priority debts include:
- Credit card debts
- Payday loans
- Bank or building society loans
- Catalogue or store card debts
- Money borrowed from friends
- Water bill
When it comes to your non-priority debts like credit cards and loans, it’s often a good idea to start paying off your most expensive debts first (the ones with the highest interest rates). This may be a payday loan, for example.
There are two main ways to cut down your debts. The first is to try to downsize your debt by shifting it onto a cheaper deal, and the second is to find extra money by budgeting and saving.
3. Talk to your lenders
People often make the mistake of avoiding their lenders when they face financial difficulties, but it only makes the situation worse. Many lenders can put you on a payment plan or put your interest on hold if you explain what’s going on – just make sure you contact them as soon as you’re missing payments or if your financial circumstances change.
4. Transfer your debt
Shifting your debts around is about decreasing the cost of the interest on your debts, however it can also help if you consolidate all your debts in fewer places, so that you can concentrate on paying it off.
If you have a decent credit score, then you might be able to save money by moving your credit card debt onto a balance transfer credit card with a 0% interest deal.
If you do decide to go down this route, it’s worth paying close attention to the length of the offer period and the terms and conditions to avoid any surprise fees and charges.
If you can’t get a 0% deal, it might be worth contacting your current card provider(s) to see if there are lower interest rate options available on any of your existing cards. You could also ask for your limit to be increased on your cards with the lowest interest. You can then move your more expensive debt onto the lower interest rate cards.
Store cards are like credit cards but can be used only in a specific store. Although they can offer tempting discounts and deals, they usually also have higher interest rates than credit cards. It’s always worth checking the interest rate (APR) carefully before you use one to borrow.
You may also want to consider if you can afford to pay it off in full every month – if you can’t, you could end up with a very expensive bill at the end of the month. If you do have an existing balance on a store card, you can usually transfer it just like a normal credit card balance.
If you’re paying a large amount of interest on a loan, see if you can find a cheaper loan to pay it off.
If your loan is for under £3,000, you could save money by using a card called a ‘money transfer’ card with a lower interest rate. These credit cards pay money straight into your current account, which you can use to pay off your loan. Then you owe the card instead.
Make sure you work out whether it is cheaper to use new borrowing rather than just continuing to repay your loan.
5. Find extra money
To help pay off debt, it’s useful to find extra cash. Some things to consider include:
Making a budget can really help, especially if your debt is due to overspending. It’s easier to make a budget than you think.
Whether it’s clothes, electrical items or even baby goods you no longer need, you might want to think about selling your unwanted things for extra cash.
Facebook, eBay and Gumtree are an easy way to sell things quickly. If you have a lot of baby things, then try grabbing a stall at a baby sale event, such as the NCT nearly new sale.
There are also lots of apps springing up to help you sell your stuff — Depop is popular with fashion bloggers, and Preloved is a great alternative to Gumtree.
To free up larger amounts of money, you may want to consider downsizing your home to make your mortgage or rental costs cheaper, or going without a car.
Have you incurred bank or credit card charges for going over your limits? You may be able to reclaim the cash back.
Switching utility providers
If you’re trying to save money, it might be a good idea to regularly review the utility providers you’re using to make sure you’re getting the best deal. So, you might want to regularly check up on deals for your energy, mobile phone, internet and insurance. According to the Department of Energy, the average person could save around £200 just by switching energy supplier.
Comparison sites like comparethemarket.com or uSwitch can help you find out whether you’re overpaying.
If you have a mortgage, it might be worth seeing whether your mortgage deal is as good as the market’s current rates. As long as you’re not locked in to a fixed or discount rate deal with early repayment charges, you can change lenders whenever you like and even just a 1% difference in interest could save you thousands over the life of the mortgage.
6. Look into grants and benefits
7. Use your savings
If you have any savings, you might want to consider using them to pay off debt. The interest charged on borrowing will almost always outweigh the interest you earn on savings, so it can make sense to clear your debts. Just make sure you don’t face any penalties for paying things off early.
8. If you’re in severe debt
If you’re struggling to make any payments, there are a number of options to consider, although none of these should be taken without seeking advice first.
- Debt management plan (DMP) – An informal agreement between you and your creditors to come up with a payment plan. You can make a DMP plan yourself by calling creditors or working with a debt charity to help you put arrangements in place.
- Administration order (AO) – If you have a county court judgment against you and are unable to pay in full then you can apply for an AO. This is a formal and legally binding agreement between you and the creditors.
- Individual voluntary arrangements (IVA) – An IVA allows you to pay your debts over a set period. You will need to contact an insolvency practitioner to set up an IVA.
- Debt Relief Order – If you don’t own a home, don’t have spare income, and owe £20,000 or less then you can apply for a DRO for eligible debts. A DRO will impact your credit rating; it will show up on your credit file and a lender may reject you if they see you have struggled with repayments.
- Bankruptcy – If you are unable to pay off any debts, then you can apply for bankruptcy. If you are declared bankrupt, then your debts are written off, but you may have to sell your home and possessions, close your business and you could even lose your pension savings.
9. Get support
You don’t have to deal with debt alone – an estimated 8 million people in the UK are facing the same struggles at one time or another. Just getting it more clarity could dramatically improve your outlook.
Here are a selection of organisations you can go to for free, expert advice. These include: