Debt can become a problem if it starts to cost too much, damages your credit score or gets you into legal trouble. The good news is it’s possible to get out of debt no matter how much you owe or earn. Here’s how to get started.
Debt can become a problem if it starts to cost too much, damages your credit score or gets you into legal trouble. The good news is it’s possible to get out of debt no matter how much you owe or earn. Here’s how to get started.
The best way to clear debt will depend on your circumstances and goals. Here are five steps to guide you through the process and help you take control of your finances again.
1. Look at the big picture
To get out of debt you first need to understand your finances. You need to know:
If you’re unsure what credit accounts you have, check your credit report. Most lenders report to us and the other credit reference agencies, so your credit report can provide a useful overview of your current borrowing.
Once you have this information it’s time to crunch the numbers. Take away your monthly expenses from your monthly income and see how much you have left over. This amount needs to cover at least the minimum payments on all your accounts.
If you have a credit card, you’ll normally need to pay more than the minimum to get out of debt. You may also want to overpay loans and car finance to clear debt more quickly but watch out for early repayment fees.
2. See where you can reduce your spending so you have more money to pay off your debt.
Here are some tips to get you started:
Use a budgeting app. Many of these analyse your spending habits, so you can see exactly where your money is going each month.
Switch your insurance. Don’t automatically renew your insurance each year – you may be able to save with a different provider.
See if you can get help with your mortgage. Talk to your lender. It may let you change your mortgage term, switch to an interest-only mortgage or offer a temporary pause in payments.
Cut the cost of credit card debt. If you’re paying interest on credit card debt, consider moving the debt to a 0% balance transfer card. You can then pay off your debt at 0% interest. Just make sure you pay off the debt before the 0% period ends, or you’ll have to pay interest on any amount you still owe.
See if you can get a Council Tax reduction. This is sometimes possible if you’re on a low income or receiving state benefits.
Check if you can get state benefits. The charity Turn2Us has a useful free benefits calculator you can use.
Increasing your income can also help you clear debt faster. Here are some money-making ideas to consider:
Pay rise. Salary surveys may help you negotiate a higher salary with your employer if you’re being underpaid.
Extra work. Freelance work or an evening job may bring in extra income.
Tax rebate. You may be able to get a tax refund if you recently lost your job or had a pay cut. Find out more at UK government website.
Selling second-hand stuff. You may be able to make some cash by selling unwanted belongings online, such as through Facebook Marketplace or eBay.
Rent out a room. If you own your home and have a spare room, renting it out may bring in some extra cash. You don’t have to pay tax on the first £7,500 thanks to the government’s Rent a Room Scheme.
Remember, the faster you pay off your debt the less interest you’re likely to pay overall.
3. Lower your interest rates
Lenders normally charge a percentage of the amount you owe – this percentage is called the interest rate. The higher the rate, the more expensive your debt. Interest is added to your account which means your debt can grow by itself. So it’s worth seeing if you can switch to a lower rate. Here are some possible options.
Debt consolidation. This is when you move multiple debts to a single account – usually via a low interest loan or balance transfer card. Debt consolidation isn’t right for everyone, but for some it can reduce the amount of interest they pay and simplify payments.
Remortgaging. If you have a mortgage, it’s worth seeing if you can get a better rate with a different provider. But watch out for early repayment fees if you’re currently on a fixed rate.
Improving your score. A good credit score increases your chances of getting accepted for lower interest rates. Your score may improve as you pay off your debt. Other ways to add points to your score include registering to vote and sharing information about everyday payments with Experian Boost.
4. Consider paying high-interest debt first.
Want to clear your debt as quickly as possible? Then pay off your high-interest debts first.
It’s easy to get started. First, make a list of all your debts. Then rank your debts by interest rate. Put those with the highest rates first (as they’ll be costing you the most).
Concentrate on paying off the debt with the highest interest rate first. Then move onto the debt with the next highest rate, and so on. This will help slash the amount of interest you pay.
But remember – make sure you make the minimum payments on all your debts each month. Late payments will damage your score and may lead to fines, defaults and even legal action.
5. Avoid taking on new debt
Avoid taking on any new debt that isn't absolutely necessary. Be especially careful if you plan to use a personal loan or balance transfer card to consolidate credit card debt. If you aren't confident you can resist the temptation to charge up the cards you’ve just paid off, then it's best to avoid consolidating your debt.
It depends on things like how much you owe and what you can afford to repay each month. You could consider closing accounts as you pay them off so you’re not tempted to build up debt again. Just be aware this may lower your credit score temporarily as it reduces the average age of your accounts.
If you are on a low income or owe a lot of money, you may need help to pay off your debts. Debt charities such as StepChange and National Debtline can help. They may suggest a formal debt solution such as:
Debt management plan (DMP). This allows you to make smaller monthly payments than originally agreed. Be wary of debt relief companies offering DMPs as they often charge high fees and may cause further financial problems. Charities such as StepChange and PayPlan can help you set up a DMP for free.
Debt relief order (DRO). This option is usually for people with relatively small debts and few assets to pay these off.
Individual voluntary arrangement (IVA). This is a form of insolvency meaning it gives you some protection from lenders and debt collectors. With an IVA you’ll usually make reduced payments for 5-6 years. Remaining debt will normally be wiped out.
Bankruptcy. This is normally a last resort if you have no way of repaying your debts. Your assets will usually be sold to repay lenders and you may have to make some payments. Your debts will usually be wiped out after you’re discharged from bankruptcy.
Checking your Experian Credit Report can help you understand your debt so you can make better financial decisions. Your Experian Credit Score is based on the information in your report and gives you an idea of how lenders may see you. You can check your credit report for free by requesting a basic statutory credit report.
New customers can also get a free 30-day trial of CreditExpert* (£14.99 a month after your 30-day trial. You can cancel this at any time). This gives you unlimited access to your score and report, plus tips for improving your score unless cancelled.
If you're worried about money, you're not alone. The charities below offer free, independent help and advice on dealing with debt.
The government-backed website MoneyHelper also has lots of useful information including a handy Debt Advice Locator tool that can help you find confidential debt advice.