“How do I get out of debt?”
It’s the question of our age, from young adults struggling on low incomes to retirees carrying debts that have been accumulated over decades.
Whatever your situation, there are a few basic steps you can follow to get out of the nightmare.
Follow the MoneyMagpie easy get-out-of-debt guide and you too can shake off the burden of debt.
- Face the tiger – make a get out of debt plan
- Get your statements organised
- Reduce the interest you pay on your debts
- Reduce your costs
- Speak to your creditors and get free advice
- Find a debt-busting friend!
- Increase your income
- Sign up to our free debt emails
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.
- Make a list of all your monthly incoming payments e.g. wages, investments, benefits etc. You can do this on paper, on a spreadsheet, or using a 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.
- List all your monthly outgoing payments e.g. rent/mortgage payments, credit card payments (taking interest into account), utilities, council tax, phone bills, food, travel, entertainment, investments, gym membership and any other regular payments you make. 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. Don’t worry if your monthly outgoing payments exceed the incoming – it’s what you should expect.
- Take your outgoings from your incomings. It’s quite possible that you will end up with a minus number! If so that will show you in black and white where your problem is.
Just seeing what you’re actually spending your money on can be a wake-up call in itself and can immediately show you where you could be cutting back.
By the way, you can find out how to do a proper budget in our article here, which gives you a list of all the things you’re likely to be spending on day-to-day so that you don’t forget those extra bits like TV licence and car insurance, etc.
You need to open and check all your outstanding bills and statements. It’s not that scary – honest!
If you’re put-off by the idea of opening these bills and statements, get a friend round to sit with you while you do it. Anything that helps you actually do it is fine!
get them into date order and filed
It’s important to get on top of your financial paperwork.
One first step is to get them into date order and then file them in a way that you can access them easily later.
So go through these steps
- Put your paperwork into different piles: bank statements, credit card statements, loan statements, electricity bills, water bills and so on.
- Get them all into date order
- File them in different sections (bank account, credit card 1, credit card 2, water bills, etc) in a filing system like a lever arch file, or whatever you like to use
- Try and fill in any gaps in their timelines by either printing them off the website if you can access that, or phoning the organisations and asking them to send you replacements.
This way you have records of your transactions and you can see easily what money has gone in and out.
inspect the paperwork
- Check the bank statements particularly – are there any mistakes there? Are there some direct debits going out that you had forgotten about? In other words, is there money you could claw back?
- Same with the credit card statements. Are there any mistakes? Are there unfair charges you could claw back?
- Aim to make money by checking these!!
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.
It doesn’t matter what system you set up for your filing, so long as it works for you, that’s fine.
Borrowing more money to pay off your debts is a slippery slope, so don’t do it. However, this doesn’t necessarily mean sticking with your existing borrowing, because switching can mean paying less interest, and getting 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 Experian).
Then, if you can, switch to a 0% deal to give yourself an interest payment break. Meanwhile, you can concentrate on repaying the actual balance. Unfortunately most 0% cards charge a transfer fee, so you’ll need to work out if it is worth it in the long term. You’ll also need to consider whether you will pay the debt off before the 0% period runs out, or whether you will need to switch the debt again – potentially racking up more fees.
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.
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. We usually advise against taking out a secured loan, which leaves you at risk of losing your house. See our article on unsecured and secured loans before making any decisions.
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 set-up 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.
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 – even taking the bus is likely to work out cheaper.
Whatever you can do to cut back, write it into your plan and stick to it.
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 can speak with your creditors on your behalf.
.. 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 including DAS, sequestration and trust deeds. You can use this trust deed calculator to find out if you qualify for help.
BEWARE: Companies advertising debt solutions in the form of IVAs, debt consolidation, debt 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.
You’d be surprised at how many people you know who are in some form of debt or financial trouble.
Ask a friend to help you work out your plan, cry on their shoulder, 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!
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 sale?
- Rent out a room in your house, or rent 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 you could try 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, especially 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. It can help you to work out if you should be getting any extra money from the government.
You can get professional advice about what you’re entitled to at your local job centre. Also, see our ideas on getting your hands on free money.
And finally… escape from the credit trap
Remember, whatever you do, don’t borrow more money to pay off your debts. Doing this digs you 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.
If you would like help and support as you climb out of debt, sign up to our free debt emails. These regular emails will guide you through the steps you need to take to tackle your debts. They’ll give you tips and advice and offer a friendly arm to lean on as you go through the process. They cost nothing so sign up now!