Dealing with your debt problems – A step-by-step

The average UK household now owes a record-breaking £15,400 in unsecured credit, representing a sharp rise over the past 12 months. This number rises even further, to £57,888, when mortgages are included.

If you’re among the consumers who make up this figure, the first thing that you should address is your mind-set. Though it won’t feel like it, there is a debt solution out there. Finding it, and finally working your way towards becoming debt free, requires that you face your circumstances head on.

  1. Totalling up the full extent of your debt

Tear open those bills you’ve ignored. Check your statements online. Track down any paperwork you may be missing.

Once you have everything to hand, create a complete list of your creditors. Your list may look something like this…

Creditor Debt type Total owed Interest rate Current repayments/Minimum repayments
Capital One Credit Card £3,254 28% £103
HSBC Loan £9,465 9.9% £450

From this list you’ll be able to order your debts in list of priority.

  1. Work out your income and expenditure

Step two involves working out how much you can reasonably afford to repay per month. This will require that you list all income (such as wages and benefits) and expenditure (such as insurance, utility bills, groceries and nursery fees). You’ll then need to total them up, then subtract your expenditure from your income.

  1. Transfer your credit card balances onto 0% where possible

If you owe money on credit cards you should consider applying for a new credit card that offers a 0% balance transfer deal. This will allow you to make repayments that decrease your debt, rather than only repaying a small amount of your debt and a larger proportion of interest.

However, you should be aware of three things:

  1. You may have to pay a transfer fee (typically up to 3% of the total balance that is being transferred)
  2. You’ll need to repay the balance before the promotional period ends, otherwise you’ll be repaying interest as well as the core debt.
  3. If you don’t manage to repay to the balance before the promotional period ends, you might consider moving the balance again. However, there’s no guarantee that you’ll credit score for a new card in the future, so it pays to research the interest rate of any card you apply for.
  1. Weigh up your overdraft options

Servicing an overdraft with a high interest rate can lead to an ongoing cycle of debt and an overdraft that’s never repaid. One option you may have in this instance is to apply for a bank account that provides an interest free overdraft of up to £2,000 for up to 12 months.

This page from the ‘Money’ website maintains an up-to-date list of banks that provide interest free overdraft offers.

  1. Think about applying for a personal loan

If you still have a reasonable credit score, then a personal loan may be a sensible solution for consolidating your debts.

Should you pursue this option, be sure to shop around and use a credit checker prior to applying to gain some understanding as to which lenders are most likely to accept you.

  1. Switch up your strategy with ‘snowballing’

The ‘snowballing’ technique is where you focus on reducing a single debt at a time, while keeping up with the minimum repayments on all of your other debts.

If you choose to do this, you’ll probably want to tackle the debts with the highest interest rates first.

‘Snowballing’ can be an effective debt strategy to keep your motivated; with each debt that is repaid you get a psychological boost from seeing and feeling as though you’re finally making progress on your debts. 

  1. If all else fails, consider a debt solution

If the steps above do little to improve your financial circumstances, or your expenditure exceeds your income, even after reducing your spending, you’ll need to seek specialist advice. The Citizens Advice Bureau, Step Change and the Debt Advice Foundation are all worth exploring.

In this instance, they may advise on debt solutions such as an Individual Voluntary Arrangement, Bankruptcy, a Debt Management Plan, and more. So there are options out there that will be suitable for your circumstances.

In the meantime, you should contact your creditors to explain your circumstances.

Once you’re debt free…

With your debts repaid and your credit report gradually repairing itself, it’s critical that you understand why you fell into debt in the first place if you’re to avoid future problems.

You should also aim to save money each month, no matter how small the contribution. This can help you overcome, or limit the impact of, any unforeseen financial emergencies – such as having to pay an expensive car repair bill.

 

 

 

 

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