Statistics from The Money Charity show that household debt has reached a record £1.5 trillion and the average consumer now owes almost £30,000.
While borrowing is normal and necessary for most people, too much debt is expensive, stressful and can damage your credit score.
If you’re worried about your debt levels, it is possible to take control — the most important thing is to start now. To help you manage and reduce your debt, we’ve put together some top tips to get you started.
1. Add up your debts
Take a piece of paper and rip it into pieces. On each piece, write down each chunk of money you owe, who you owe it to, and the interest rate. Then add them all up. Don’t worry if it’s a lot. The important thing is that you now know the size of the task at hand.
Once you’ve added up all your debts, it’s time to prioritise them.
2. Prioritise your debts
Go through your list of debts and categorise them into ‘priority’ and ‘non-priority’.
Priority debts include:
- Mortgage, rent, or loans secured against your home
- Gas and electricity bills
- Court fines
- Child maintenance
- Council tax
- Hire purchase agreements for essential items
- Income tax, national insurance and VAT
- TV licence
Not paying these can have serious consequences like home repossession, visits from the bailiffs, a county court judgment or even imprisonment.
Non-priority debts include:
- Credit card debts
- Payday loans
- Bank or building society loans
- Catalogue or store card debts
- Money borrowed from friends
- Water bill
When it comes to your non-priority debts like credit cards and loans, it’s often a good idea to start paying off your most expensive debts first (the ones with the highest interest rates). This could be a payday loan, for example.
There are two main ways to cut down your debts. The first is to try to downsize your debt by shifting it onto a cheaper deal, and the second is to find extra money by budgeting and saving.
3. Tell your lenders
People often make the mistake of avoiding their lenders when they face financial difficulties, but it only makes the situation worse. Most lenders can put you on a payment plan or put your interest on hold if you explain what’s going on - just make sure you contact them as soon as you’re missing payments or if your financial circumstances change.
4. Shift your debt
Shifting your debts around is mainly about decreasing the cost of your debts, however it can also help if you put all your debts in one or two places, so that you can concentrate on paying it off.
If you have a decent credit score, then you might be able to to save money by moving your credit card debt onto a balance transfer credit card with a 0% interest deal.
If you do decide to go down this route, it's worth paying close attention to the length of the offer period and the card's terms and conditions to avoid any surprise fees and charges. (You can read more about balance transfer cards here.
If you can’t get a 0% deal, it might be worth contacting your current card provider(s) to see if there are lower interest rate options available on any of your existing cards. You could also ask for your limit to be increased on your cards with the lowest interest. You can then move your more expensive debt onto the lower interest rate cards.
Store cards are like credit cards, but can be used only in a specific store. Although they can offer discounts and deals, they may also have higher interest rates than some credit cards. It's always worth checking the interest rate (APR) carefully before you use one to borrow.
You may also want to consider if you can afford to pay it off in full every month - if you can't you could end up with a very expensive bill at the end of the month. If you have an existing balance on a store card, you can usually transfer it just like a normal credit card balance.
If you’re paying a large amount of interest on a loan, see if you can find a cheaper loan to pay it off.
If your loan is for under £3,000, you could save money by using a card called a ‘money transfer’ card with a lower interest rate. These credit cards pay money straight into your current account, which you can use to pay off your loan. Then you owe the card instead.
Make sure you work out whether it’s cheaper to use new borrowing rather than just continuing to repay your loan.
5. Find extra money
To help pay off debt, it’s useful to find extra cash. Some things to consider include:
Making a budget can really help, especially if your debt is due to overspending. It’s easier to make a budget than you think — find out how in our budgeting article How to make a budget (and stick to it).
Whether it’s clothes, electrical items or even baby goods you no longer need, you might want to think about selling your unwanted things for extra cash.
Facebook, eBay and Gumtree are a an easy way to sell things quickly. If you have a lot of baby things, then try grabbing a stall at a baby sale event, such as the NCT nearly new sale.
There are lots of apps out there to help you sell your stuff — Depop is popular with fashion bloggers, and Preloved is a great alternative to Gumtree.
To free up larger amounts of money, you may want to consider downsizing your home to make your mortgage or rental costs cheaper, or going without a car.
If you have taken out loans, it’s worth checking to see if you were mis-sold payment protection insurance. It could be worth hundreds of pounds.
Have you incurred a bank or credit card charge for going over your limits? You may be able to reclaim the cash back.
Switching your providers
If you're trying to save money, it might be a good idea to regularly review the utility providers you're using to make sure you're getting the cheapest deal. So you might want to regularly check up on deals for your energy, mobile phone, internet and insurance. According to the Department of Energy, the average person could save around £200 just by switching energy supplier.
Comparison sites like comparethemarket.com, uSwitch and Carphone Warehouse can help you find out whether you’re overpaying. ClearScore also now offer energy deals - you can find these in the Offers section of your ClearScore.
If you have a mortgage, it might be worth seeing whether your mortgage deal is as good as the market’s current rates. As long as you’re not locked in to a fixed or discount rate deal with early repayment charges, you can change lenders whenever you like and even a 1% difference in interest could save you thousands over a year.
It's worth thinking about reviewing your mortgage at least once a year and when your current mortgage deal comes to an end or interest rates change. Just make sure to look out for remortgaging costs (such as early repayment charges and exit fees).
6. Look into grants and benefits
7. Use your savings
If you have any savings, you might want to consider using them to pay off debt. The interest charged on borrowing will probably outweigh the interest you earn on savings, so it might make sense to clear your debts. Just make sure you don’t face any penalties for paying things off early.
8. If you're in severe debt
If you're struggling to make any payments, there are a number of options to consider, although none of these should be taken without seeking advice first.
Debt management plan (DMP) - An informal agreement between you and your creditors to come up with a payment plan. You can make a DMP plan yourself by calling creditors or working with a debt charity to help you put arrangements in place.
Administration order (AO) - If you have a county court judgment against you and are unable to pay in full then you can apply for an AO. This is a formal and legally binding agreement between you and the creditors.
Individual voluntary arrangements (IVA) - An IVA allows you to pay your debts over a set period. You will need to contact an insolvency practitioner to set up an IVA.
Debt Relief Order - If you don’t own a home, don’t have spare income, and owe £20,000 or less then you can apply for a DRO for eligible debts. A DRO will impact your credit rating; it will show up on your credit file and a lender may reject you if they see you have struggled with repayments.
Bankruptcy - If you are unable to pay off any debts, then you can apply for bankruptcy. If you are declared bankrupt, then your debts are written off, but you may have to sell your home and possessions, close your business and you could even lose your pension savings.
9. Get support
You don't have to deal with debt alone - over 8 million people in the UK are facing the same struggles. Just getting it off your chest could dramatically improve your outlook.
There are a number of organisations you can go to for free, expert advice. These include: