For a richer life

How do I get out of debt?

How do I get out of debt? Dan Simpson/Flickr

We get lots of messages asking “how do I get out of debt?” Well, it’s not easy but it is straightforward. Financial debt is a worrying presence – follow the Moneymagpie easy get-out-of-debt guide and escape the misery!

Step 1: Get a debt reduction plan

Admitting that you need help can be the hardest part of getting out of debt, but it’s essential. Once you admit you need to do something about it, you’re on your way.

First off, get a plan. Work out how you’re going to get out of debt, even if it takes a while.

  1. Draw up a list of all your monthly incoming payments e.g. wages, investments, benefits, alimony etc. You can do this on paper, on a spreadsheet, or using our budget calculator. If some of the amounts vary every month then use the amount from the worst case scenario, i.e. the lowest possible amount of money coming in.
  2. Next, list (or enter into our budget calculator) all your monthly outgoing payments e.g. rent/mortgage payments, credit card payments (taking interest into account), utility bills, council tax bills, phone bills, food bills, travel costs, entertainment/clothing/magazine expenses, investments, gym membership and anything else that you can think of which you pay out on a regular basis. Be honest with yourself! This time use amounts from the highest possible payment scenario. If you can’t work out how much you spend a month on things like food and clothes, then keep a spending diary. Make a note of everything you buy for a few weeks. This alone might even shock you into seriously cutting back.
  3. Don’t worry if your monthly outgoing payments exceed the incoming – it’s what you should expect.
  4. Next, take the piece of paper you used, or print off the budget calculator or spreadsheet, and divide your outgoing payments into two columns: “flexible” and “inflexible”. The “inflexible” column should include payments which are not at all adjustable and are vital to the running of your home e.g. mortgage or rent (although negotiations on mortgages for a payment break can sometimes be made), council tax, TV licence, child support payments etc.
  5. The “flexible” column should include all payments which you can cut back on or withhold for a short period of time e.g. utility bills which can be reduced, food, clothes, entertainment, travel etc. Another expense which can be cut back is the money paid out to banks, credit card companies and loan companies. These do need to be paid, but they are a lot less important than your mortgage payments and council tax. Contrary to popular belief, these companies don’t have many rights unless the loan is secured against your property and bailiffs in particular have very little power. However, do not be misled into thinking you can ignore these debts – it simply means that you need to prioritise which payments need to go out.

Step 2: Open your utility bills and bank statements and get them organised

It’s not that scary – honest! You could even make money from it. Sort out a filing system and go through all your bills and statements. If there are any mistakes then call up the company and rectify them as soon as possible. You might find you have money going out in direct debits you don’t need anymore, so cancel them. You might even find that the bank has made mistakes and taken money out that they shouldn’t have. You can claw this back. Woo hoo!

Once you have a filing system in place, it will make keeping on top of your finances much easier. This way, you won’t be able to pretend you’ve forgotten a bill – because you have to stick to the system to keep everything in date order. A simple system such as organising paperwork into “paid bills”, “unpaid bills”, “bank statements” and “income” will do it.

There, you’re already more in control of things than you were before. Let’s motor on…

Step 3: Cut the cost of your borrowing

Borrowing more money to pay off your debts is a slippery slope. Our best advice? Don’t do it. But you do need to check that your existing borrowing is from the best deals you can get – that way you pay less interest, and get out of debt faster.

Credit card debt – If you’ve been borrowing on credit cards or store cards, you can cut back on your monthly interest by transferring the balance to a card with lower interest rates (assuming your credit record is good enough – find out for free with CreditExpert).

Then, if you can, switch to a 0% deal to give yourself an interest payment break. Meanwhile you can concentrate on slowly repaying the actual balance. Unfortunately most 0% cards charge a transfer fee (usually around 2.75% of the amount you are transferring onto the card) so you’ll need to work out if it is worth it in the long term.

It may be better for you to switch to a card with a low lifetime balance transfer offer. This is where you pay a low interest rate for the whole time you are paying off the debt. Unlike the 0% deals which are for a fixed amount of time, you won’t have to keep changing cards with this type. It could be better for you so check out what’s on offer here.

Loans – A personal loan is usually the next cheapest way to borrow money, after the best credit card deals. You have to make regular repayments over a fixed amount of time. See our loans comparison table to check out the deals available. We usually advise against taking out a secured loan, which leaves you at risk of losing your house. However, you could consider it if you absolutely trust yourself to make the repayments (this is really, really important!). Secured loans are generally cheaper than unsecured ones but they are more dangerous. See our article on unsecured and secured loans before making any decisions.

Mortgage – How long have you had your mortgage? If the fixed-rate or introductory period has expired, the chances are you’re shelling out far more than you need to. As mortgage payments are likely to be your single biggest expense, it’s definitely worth keeping on top of it, particularly while rates are so low.

Before you try to remortgage it’s a good idea to contact your existing lender to make them aware of the fact you’re considering making a switch. They might even offer you cheaper rates. Most importantly, check whether you will be charged an exit fee if you move your mortgage.

It’s then a case of tracking down the cheapest deal you can get – start by looking at our independent comparison table.  Remember to take into account any exit fees from your old lender, and entry fees for your new lender, to get the true amount you will pay or save by switching.

It may seem tempting to get a bigger mortgage, and use some of the cash to pay off your existing debts. Beware, though: this is not a decision to be taken lightly and should only be carried out if it’s ultimately going to save you money. Remember that adding all your unsecured debts (credit cards/loans etc) to your mortgage increases the risk of losing your home because of the amount your loan increases by. Read our article about remortgaging your home to pay off your debts to help you make a better informed decision.

To find out everything you’ll ever need to know about mortagages, download our free mortgage guide.

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Step 4: Cut your other costs

Go back to your plan (Step 1). Once you have your flexible column sorted, sit down and brainstorm every possible idea for cutting down on every point on the list.

  • Use advice from friends and family, information on our website (there is loads!) and original ideas that you come up with yourself.
  • Use our comparison table to switch your energy provider and you could save hundreds a year on electricity and gas bills.
  • Buy supermarket own-brand products rather than brand names.
  • Hunt down bargains in charity shops and sales.
  • Set limits for spending on a night out.
  • You could maybe ditch the car and cycle to work – or even taking the bus is likely to work out at a lesser cost.

Whatever you can do to cut back, write it into your plan and stick to it.

Have a look at out article on cutting your costs to start paring away the essentials.

Step 5: Speak to your creditors

If you’re still struggling to make your repayments, the worst thing you can do is stick your head in the sand. Believe it or not, most lenders don’t want to see you in debt. Reclaiming property and possessions is really costly, as is going through the courts – so most creditors will use these options as very last resorts.

Rather than hiding away from your debts, phone everyone you owe money to and explain your situation.

  • Give them details of your plan to cut back so they know that you’re doing all you can to pay them.
  • Some banks and loan providers can be sympathetic in particular circumstances and in some cases can offer a short payment holiday until you’re back on your feet.
  • Nothing bad can come from calling them to make them aware of your situation – bad things can happen when you ignore what’s happening.

If you’re one of those people who truly hates confrontation and can’t bear the thought of having to talk it through with your creditors, then providing you have serious debts the CAB or StepChange Debt Charity will speak with your creditors on your behalf.

See a debt counsellor for free advice and solutions, but avoid debt management companies

Because of the severe debt problem we have in this country, there are free organisations dedicated to helping people get out of debt. These organisations are busy all the time because of the high volume of people requesting help. But if you are really struggling with your debt, it’s well worth persevering and either waiting on hold or getting up early for an appointment because these people have the best experience in solving debt problems. Click here for contact details for some of these organisations.

In Scotland equivalent debt relief solutions are available include DAS, sequestration and trust deeds, you can use a this trust deed calculator to find out if you qualify for help.

BEWARE: Companies advertising debt solutions in the form of IVAsdebt consolidationdebt management and bankruptcy practitioners are NOT free advice organisations, they are trying to make money from you. If you’re in any doubt then check if the organisation is a registered charity, as any authentic advice line will be.

Step 6: Get a debt-busting buddy

You would be surprised at how many people you know in some form of debt or financial trouble. Ask a friend to help you work out your plan, cry on their shoulder and offer the same service in return, share tips on saving money and text each other money-saving deals whenever you’re out and about. Having someone to support you is really important. There is a strong link between debt and depression, so having someone around to help you can be a real life-saver.

Set up money-making schemes together and set yourselves targets each month. Don’t panic when sometimes you don’t achieve them: it’s a slow process and as long as some progress is being made, however little, you’re moving in the right direction!

Step 7: Make money from hobbies and sidelines

There are loads of things you can do on top of your full-time job which can help boost your income, and most of them are enjoyable too! Check out our Make Money section to get ideas on this.

  • Think about what skills or hobbies you have – then think about how you can turn them into money-making opportunities.
  • Start with online surveys. They’re easy and you can do them from your computer in your lunch hour.
  • Then recycle your mobile for cash. It’s easy and helps you declutter.
  • If you’re an expert knitter then why not try selling your hats, scarves and gloves on eBay or at a local car boot?
  • Rent out a room in your house, or your garden as an allotment.
  • Ask all your neighbours if they want you to walk their dogs for a small fee.
  • If you can’t think of anything you like or are good at, then why not see if your local supermarket are hiring evening workers, or a nearby restaurant or pub?
  • There’s no shame in doing everything you can to get yourself out of the debt trap and you never know what kind of interesting people you’ll meet along the way!

Get free money

If your household earns under a certain amount you may be entitled to benefits or tax credits, particularly if you have children. Even if you don’t think you’re eligible it’s worth taking a look on Entitledto – a free benefits calculator to work out if you should be getting any extra money from the government. If you want professional advice about what you’re entitled to then you can pop into your local job centre and they’ll tell you what you need to know. Also, see our ideas on getting your hands on free money.

See our article on getting richer in half a day for more ideas on maximising your income.

And finally…escape from the credit trap

Remember, whatever you do, don’t borrow more money to pay off your debts. By doing this, you dig yourself into a deeper hole and interest will keep rising until you’re in way over your head. There are no benefits to paying off debts with credit cards and more loans.

Next time you see the word “credit”, mentally replace it with the word “debt”. Because that’s all credit is – another way of saying debt – and even “interest-free debt” doesn’t sound so appealing when you word it truthfully. Once you face up to the reality of your financial problems, you can start to overcome them.

…finally…sign up to our free debt relief emails and get out of debt

If you would like help and support as you climb your way out of debt, sign up to our free debt emails which will give you ideas, tips, help and a friendly arm to lean on. They cost nothing so sign up now!

4 Responses to “How do I get out of debt?”

  1. ClareTaylor says:

    Hi Jasmine,
    Please please help!
    Years ago, my partner and i (now my husband) got into trouble with credit cards. Started to miss payments etc….
    It all built up so I asked for help and advice from my local CAB office.
    They advised me to write to all my creditors to arrange payment schemes.
    This worked great!
    They all eventually wrote back and a payment agreement was worked out until we were finally able to pay off all debts. FAB!
    But after a few attempts at trying to write to them MBNA didn’t write back.
    CAB advised me that this debt may get written off and because i’d tried to contact them then leave it for now.
    4 years on… thinking we were debt free i received a letter out of the blue saying they’d discovered me on the electoral role (which i’ve always been on) and they were demanding the debt to be paid in full within 14 days or else i’d have a CCJ.
    I was in shock so ‘stupidly’ phoned them asking why now? and tried to explain that i’d been writing etc…
    i also explained that i was due to give birth (2nd child) anyday. The person on the other end of the phone was more than unhelpful and quite rude!
    So i’m afraid i told him to ‘get lost’ HORMONES!
    I still acknowledged this was my debt and would work out a way to pay it off.
    2 days later i gave birth, only to be greeted with a CCJ on my doorstep waiting for me.
    I went straight to my local CAB again. They advised me to contest it as i had every intention of paying it off and i’d also tried to contact them in the past to pay this off!
    It all ended up in court and the judge had already decided before i walked into his courtroom that it was my own fault and it needed paying off (plus £1,000 on top) immediately!
    Thankfully my parents came to the rescue, but as this had gone over a certain number of days since the first letter i’d been slapped with a CCJ.
    Had the CAB told me that i had no choice and to pay it, i could have asked for my parents help and paid it off in full, without the traumour of going to court and wouldn’t have a CCJ against my name now.
    This was 3 years ago.
    We are now pregnant with our 3rd (and final :0) ) child and are desperate to move house.
    We’ve been debt free for years now (apart from our little £42k mortgage)
    We have no loans, credit cards or debts to our name. Have been living to our means for over 3 years and have equity sitting in our property.
    We really need to move but thanks to me listening to my local CAB i have this CCJ against my name for at least another 4 years now.
    Under these circumstances can this be removed?
    It just seems so unfair.
    With the no debt situation and equity in our property the only thing stopping us from moving on with our life is this CCJ.
    Please please help me!
    Many thanks in advance
    Clare xxxxx

    • Hello Clare,

      I’ve put in a request to the credit check agencies to see what they think, but my thoughts are that you should use the facility that Experian and Equifax have which allows people to explain their situation on their credit report. So if you have extenuating circumstances (which you seem to have), you can explain what they are and why the marks against your name should be largely ignored. However, when I hear back from the credit agencies I’ll write again. Best! Jasmine :-)

    • Hello again,

      I’ve been in touch with Experian and James Jones has sent me this answer:
      “Judgments are kept on credit reports for six years from the original judgment date.
      Assuming the judgment was paid, it should be marked as ‘satisfied’ with all three credit reference agencies. If is was paid but is showing as outstanding, contacting the court should put this right.
      Satisfaction does not affect the six-year retention period. However, if the judgment was paid in full within one calendar month of the original hearing – which I don’t think it was – it should not have been registered with the credit reference agencies.
      Adding an explanatory notice of correction may help. Future enquirers will certainly see this and may take it into account. Statements can be up to 200 words and should be sent to all three CRAs.
      Lenders usually place more emphasis on an applicant’s most recent credit history, so something that happened 3+ years ago isn’t likely to have as much influence on credit scores as something more recent. A satisfied judgment also looks better than an outstanding one.”

      So do get in touch with Experian, Equifax and Checkmycredit and make sure you put an explanation on all of them. That will help you with your mortgage application.

      Best, Jasmine

  2. theodor says:

    Interesting article but i can’t agree with No.4 on the list. Yes inform your creditors when you have a problem (before the problem starts if you see it coming) as you can’t bury your head in the sand.. it doesn’t work or make the problem go away. But.. don’t expect sympathy from them or help or understanding. They actually don’t mind if you are in debt and are not interested in the reasons (excuses as they put it) for it. It means they can keep adding interest and late payment charges every month so the debt gets bigger. That’s in their favour. Court action ‘may’ be a last resort, but the threats of Court action arrive very quickly (even if they have no intention of taking such action it’s standard practice to instil fear and worry in the hope you will pay what you owe.) Proof of benefits, over drawn bank statement and income/expenditure info will generally be responded to as if you had never sent them with ‘stop ignoring us, your debt won’t go away’ or ‘money worries can effect relationships and sleep, pay now or we will send a field agent’ etc etc (send everything by recorded delivery if you can as they will say they never received such information.) Never talk to them on the phone but in writing only as proof of what has been said. They will say one thing and do another or try to intimidate you into paying what you cannot afford using threats of Court Action of sending an agent to you home etc, so everything has to be in writing only. If they have your number it won’t matter if you have just come out of hospital after a brain tumor operation (after giving proof of such in writing) as you will receive anywhere from 5-30+ calls a day (depending on how many accounts you have) and it is relentless, asking you to pay what you haven’t got and insisting they will keep calling until you pay up! Complain to trading standards about debt practices like that but don’t expect them to be of much use. TS are VERY reluctant to go up against banks and Credit Card companies on your behalf and usually suggest you seek to the CAB for advice or ignore you altogether. CAB can be helpful as well as the nationaldebtline. (Avoiding sites with similar names that are nothing to do with the above.)

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