It’s easy to get into debt — borrowing a little here and putting stuff on your credit cards there — but getting out of debt can be a little harder, especially if you’re not exactly sure where to start.
And with the amount of advice available, it can be difficult to see through the fog and find a solution that works for you. So, to help you find your own solution, we’ve put together 5 steps to help you reduce your debt.
Step 1: Make a list of everything you owe.
To take your first step towards getting out of debt, it’s a good idea to know where you stand financially.
You’ll need the complete picture to work out where to start. Debt is very rarely a simple case of spending too much on coffee, clothes or fancy restaurants, more often than not it’s lots of little things adding up.
So, to get to the bottom of everything, you’re going to need to take a good, in-depth look at your finances. And that means you’re going to need to make a list of everything you owe.
Yep, everything.
What to include on your list
It’s important to be as thorough as you can at this stage, as it helps you work out a plan to start tackling your debt head-on. Include things like:
- How much you owe on your credit cards
- How much you have left to pay on any loans
- How much is left to pay on your mortgage(s)
- How much is left to pay on your phone contract
- How much you have left to pay on any finance plans (like car finance)
- How much you have left to pay on outstanding tax payments
- How much of your overdraft you need to repay
- How much is left on any student loans (this is optional, most student loan repayments are more like a tax than a debt)
Next step, working out how much they cost you
Once you’ve put together a list of all of your debts, it’s a good idea to write down the interest rates and how much you pay back every month.
To make it easier it’s good to grab or download the following:
- Your most recent bill statements for all credit cards and loans.
- Your credit reports – this allows you to check for accuracy and identify all recorded debts.
- Your latest credit score – this allows you to find out where you are eligible for lower interest rates or a debt consolidation loan which we’ll come to later.
Once you have everything in one place you’ll be able to add your monthly loan payments and minimum credit card payments together to determine the minimum amount you need to pay each month to work towards getting out of debt.
This all sounds very boring and like a lot of work — and we won’t lie to you, it kind of is — but it’s the most important step in taking control of your finance and getting out of debt.
Step 2. Work out a monthly budget.
Now that you’ve got all of your debts in one place, the next step is to work out how much you need to pay each month to get out of debt quicker.
But before you can get an idea of how much you can pay off each month, you need to know how much you’re already paying out every month on living costs and expenses. This includes things like:
- Rent or mortgage payments
- Food costs
- Utility bills (gas, electricity, water, broadband)
- Your mobile phone bill
- Petrol and car maintenance costs (MOT, road tax, servicing)
- Entertainment costs (Sky, Netflix, Amazon, Spotify etc.)
- Clothing
- Commuting costs
All of these will affect the amount that you’ll be able to set aside to pay off your debts so it is important to include them.
(Top tip: if your outgoings vary from month to month, take the most expensive month and use that as your base rate. That’ll stop you from being left short if things run a little pricey one month.)
Working out what you can afford to pay
Once you’ve got everything written down, you can start to work out your monthly outgoings and then deduct them from your monthly income. That’ll give you an idea of how much you have to put towards clearing your debt a little faster.
Unlike loans and mortgages, credit cards give you the ability to choose what you repay each month. And while minimum repayments might seem like a blessing in the short term, they usually mean that you’ll be paying off your debt for much longer than necessary.
How boosting your monthly repayments can save you a small fortune
Sometimes, boosting your monthly minimum repayments can help you reduce your debt much quicker and save a tonne in interest.
For example, if you owe £2000 on a card with 18% annual interest, your minimum monthly repayment would be roughly £47. At this rate, it would take you 24 years to pay off the card and you would end up paying over £2500 in interest.
However, if you could commit to paying back £100 a month, you could pay off the card in 2 years and pay just £359 in interest, saving you a whopping £2100 plus change.
If you’d like to find out how much you could save by overpaying on your minimum repayments, Barclaycard’s super easy calculator lets you find out in just a few seconds.
Step 3. Look for more opportunities to save.
This one may seem a bit obvious but you’ll be surprised by how much you can save by cutting back on a few things here and there, so grab your bank statements and a pen and start sorting through them, looking for things to cut back on.
At first, it might seem daunting to trawl through your expenses looking for ways to make savings but it’s well worth the effort. (As we’ve already seen, finding an extra £50 a month can make a real difference to how quickly you can get out of debt.)
However, getting out of debt and staying out of debt are as much about making lifestyle shifts as they are penny-pinching. That means that if you cut back everything you enjoy, it’s likely you might find yourself in a sticky situation again once you’ve paid off your debt.
Instead, why not break your expenses into three categories: essential (these are the ones you couldn’t go without, like childcare or groceries, etc…), important (these are the ones that aren’t essential, but that make you happy, like date nights or takeaways) and non-essential (these are the things you can definitely live without).
By keeping the essential expenses, cutting back on the important ones and cutting out the non-essential ones, you can save a fair chunk of money without drastically changing your lifestyle. That helps the habits stick, long after you’ve paid off your debt.
Step 4. Increase your income
Almost every guide to getting out of debt will include advice to look for opportunities to save, but in some cases, the money you save from not ordering your daily coffee might not get you out of debt on its own.
If you’ve found that even by cutting back, you’re still going to struggle to pay off your debt, it might be a good idea to think about increasing your monthly income. This will give you more money to put towards your monthly payments and get out of debt.
Of course, a new job or a pay rise would help but there are plenty of other ways for you to increase your income outside of your current employment too.
A great way to bring in some extra cash is to take stock of everything you own. Have you got anything lying around that you don’t use very much that might fetch a pretty penny?
A dusty guitar you promised yourself you’d play more…
That rowing machine you were determined to use every day and never did…
Your old record collection in the loft that hasn’t been played in 20 years…
Whack them online and see how much cash you can get for them.
You can also look to make larger changes by downgrading your car or selling your second car. You could also look into downsizing your house to one with lower monthly mortgage repayments. Or maybe even starting a business on the side and using your skills to earn a little bit of pocket money.
Step 5. Find ways to reduce your interest rates.
Now that we’ve covered the everyday things you can do to get out of debt, it’s time to bring out the big guns.
Interest rates can make paying off debts feel like you’re fighting a losing battle. The more you owe, the more interest you are charged, the more you have to pay back.
It’s not uncommon to feel like you’re caught in an endless cycle, but there are a number of ways to reduce your interest rates and give yourself a fighting chance.
There are three main options for reducing the interest rates on your debts:
A. Credit cards with a lower interest rate
Depending on your credit rating, you might be eligible for a credit card that has a much better interest rate than your current rate.
If you have a good payment history and good credit, your credit card issuer might consider a lower rate for a specific period of time or, even better, permanently. Asking the question costs nothing and it could work wonders for your interest rate.
With a lower interest rate, you’ll be paying off more of your balance and chipping away at your debt rather than the interest.
B. Balance transfer credit card
We know what you’re thinking: “get another credit card to get out of debt?”
Well, hear us out.
If you can’t get a lower interest rate from your current credit card company then you might be able to transfer your credit card balances to a balance transfer card with a lower or possibly 0% interest rate.
With a 0% interest rate, every repayment you make will go towards clearing the debt rather than paying off interest.
A lot of the time, credit card companies will be offering promotional rates for a set period in exchange for you transferring a balance to a new card, so be sure that you can pay your debt off in the 0% window and don’t get caught out when the interest rates jump back up.
It’s also worth noting that to qualify for a balance transfer card, you will need to meet the company’s requirements (which usually means having a good credit score) and will most probably need to pay a transfer fee of around 3% of the card balance.
C. Consolidate your debt
This is one of the most common ways to get out of debt and involves rolling all of your repayments into one manageable loan. This is called debt consolidation.
A debt consolidation loan lets you combine all of your existing debts into one manageable debt with one fixed monthly payment. Not only does this make it easier for you to keep track of, making sure you don’t miss payments, but it could also save you loads in interest too.
The idea is quite straight-forward. You need to work out how much you owe in total (using your list from earlier) and apply for that amount in a separate loan at a much more favourable rate of interest. You then pay all of the debts at once and are left with one easy-to-manage monthly payment.
In fact, debt consolidation loans can be used to roll a variety of debt into one payment:
- Overdrafts – the rules on agreed overdrafts have recently changed meaning that interest rates can often rise to a huge 40%.
- Personal loans
- Credit card debt
- Store cards
How to get a debt consolidation loan
There’s a couple of options when it comes to getting a debt consolidation loan. You can go it alone and speak to lenders or use comparison sites to find yourself the best rate.
Or, you could speak to a broker. Brokers often charge a fee but they do the hard work for you and can find a better deal, just like we did for Andrew who managed to save £800 a month by using a consolidation loan to pay off his credit card debt.
Wondering if consolidating would save you money?
If you’re wondering if debt consolidation would save you money then you can use our simple and straight-forward debt consolidation calculator to see how much you’d need to borrow and how much you could save by rolling everything up into one loan.
Just enter all of your different debts, the interest rates and how much you pay every month and we’ll calculate how much you could save by rolling them all up into one payment.
Feeling worried about your debt?
Being in debt can be overwhelming and very worrying and it’s often difficult to work out what you can do and where to go next.
Fortunately, there are a number of charities that offer free, impartial and confidential advice on how to get on top of your debt. If you can, get in touch with them early and they’ll help you get back on track with personal advice for your situation.
We recommend both Stepchange and National Debtline who offer free and impartial advice to help you manage your debt.
IF YOU ARE THINKING OF CONSOLIDATING EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
A representative example of a secured loan for debt consolidation, borrowing £53,590 over 10 years with 120 monthly repayments of £596.09. Annual Interest Rate 6.04% fixed for 60 months, then variable. Representative APRC 7.9%, total amount repayable £71,625. Includes a maximum broker fee of £2,995 and lender fees of £595.