If you’re struggling to manage or clear debts, you are not alone. In January 2020, a report by the TUC revealed that the average UK household had unsecured debts worth £14,540 – an equivalent of 27.5% of their overall income.
Although there may be a difficult economic period ahead, there are ways to regain control and reduce what you owe. Follow our three-stage plan to put you on the path towards becoming debt free.
1. Assess your debts
Once you get a better handle on your current situation, you can start taking steps to cut down debt.
Start with a list
Don’t bury your head in the sand – ignoring any outstanding bills or payments will only make a bad situation worse. Start by making a list of all your debts and regular outgoings so that you can work out your total monthly spend. Use your bank statements to make sure you don’t miss anything.
Create a budget
Next, work out your total household income and take away all your expenditure to see how much money you may have left over to reduce your debts. If you’re spending more than you make, you can at least now begin to understand the size of the problem and start to act.
Prioritise your payments
Reorder your outgoings by of importance, ensuring essentials for keeping a roof over your head. Mortgage payments, council tax and secured loans are ranked highest followed closely by utility bills, groceries and other debts. Luxuries like satellite TV, leisure or holidays come last - if you have no income left to cover these, they should be cancelled.
2. Take control of your finances
Get your financial status back under control by seeking advice if necessary and planning your next move.
Seek advice if you need to
If step one is still leaving you with a hole in your finances each month, help is available. The first step, however, is to let your creditors know. This should stop them taking action against you. Once they have been informed, seek advice on negotiating with your creditors from an agency like Citizens Advice or the National Debtline.
Create a debt repayment plan
Make a list of all your current debts, including the minimum payment and the interest rate, then rank them in the order you need to pay them off. The best way to do this is to start with the debts that have highest interest rates, as this will save you the most money over time. Once this debt is paid off, put the extra money towards the next debt and so on until they are all repaid.
Save on interest payments with a debt consolidation loan
Small loans, payday loans, store and credit cards and overdrafts often charge high interest rates, which can make them very expensive. Combining all of these costs onto a single debt consolidation loan could save you money and helps you pay off all of your current debts at once, relieving the stress and financial pressure of having to deal with competing demands on your money, and giving you one lower monthly repayment. Please be aware that your total interest payable could be higher if your consolidation loan is over a longer term.
Don’t add more debt
Unfortunately, you can’t spend your way out of debt. Ignoring the situation and taking on more credit will just make the whole thing worse. Ask yourself if you really need extra credit and if you can afford more repayments. Concentrate on paying off what you owe before taking out new cards or loans so you can clear up your debts, boost your credit rating and ultimately regain your financial independence.
Avoid making large purchases
From seasonal sales to price reductions or special discounts, there are plenty of ways retailers will try to get you to part with your money. Cut-price deals on big-money items like furniture, cars or even a long holiday may be tempting, but they will hit your ability to clear your current debts. Only buy items you really need and can afford.
Don’t miss payments
Debtors don’t like being ignored. Missing payments or wishing the debt away could result in extra interest charges that may damage your credit rating. You could also end up with bailiffs knocking on the door seeking to take away your possessions as compensation for what is owed. If you’re struggling to keep up, talk to your bank or credit card provider - they may be able to provide options for a suitable repayment plan
Don’t wait for a windfall in the future
Don’t bank on a future inheritance or pay rise helping to pay off your debts. Neither are guaranteed and both may also result in extra tax charges, leaving you with even less money. Also, by the time that inheritance or pay rise comes, the interest on your debt may well have rocketed.
3. Change your habits
Once you’ve started to take back control of your spending, try to mindfully change your relationship with money and take a healthier approach.
Save on bills
Besides your mortgage or rent, your household bills are probably your biggest monthly expense. See how much you can save by changing your energy supplier, giving up satellite TV for Freeview and reviewing your current mobile, landline and broadband packages. Getting a new quote for your buildings and contents insurance through a different provider is another way to make savings.
Identify day-to-day savings
It is easy to fritter away a fortune without even noticing - a £4 coffee on the way to work every morning doesn’t seem like much, but it amounts to over £1,000 a year. Cost-cutting exercises such as batch-cooking, swapping gym memberships for outdoor running or joining a library instead of buying books will help you manage your budgets without further borrowing.
Use savings to pay off debts
These days the interest you make on savings is relatively low, especially when compared to the interest charged on debts, so make sure any money you manage to save on bills and luxuries is put straight back into clearing what you owe as quickly as possible. There will be plenty of time for saving up for treats when you’re debt-free.
Stick to your guns
Once you start following these simple steps to financial freedom, you need to keep going. It will sometimes seem like hard work, and you will feel like you still have a long way to go. But stick to the plan and you will start to feel the benefit, and your debts will become much more manageable and, in time, will disappear altogether.
You can read more in the report by TUC here.