Staying on top of your debts is one of the best things you can do for yourself. These simple steps will help you to pay down your debts and enjoy your best money year yet.
But even if you're not one to worry, debt can be expensive. So it's worth taking the opportunity at the start of the year to work out where you stand with your debts - saving you money and reducing stress further down the line. Here's our step by step guide to help you pay down your debts this year.
Step 1 – Understand the benefits of paying off your debts to help motivate yourself
Actively paying down your debts is one of the best things you can do for yourself financially. But whether you’re worried about your debts or more casual about the whole thing, it’s easy to automate all your debts and never really think about them. Many of us immediately set up a direct debit for repayments, and then just simply wait until the balance has been cleared. This is great for making sure you never miss a payment, but by not proactively trying to overpay your debts, you could be losing out.
So why bother to proactively pay down your debts?
1. It will save you money
Ultimately debt is expensive and the longer you take to pay it off the more it will cost you overall. Unless you're lucky enough to be on a 0% interest deal, you'll be paying a price (and often a steep one) for borrowing. Whether this is a store card, a car loan or spreading the cost of a new boiler, the longer you have the debt the more you'll pay for the privilege. So actively paying down your debt, and not just going along with the minimum amount, could save you a lot of money in the long term.
2. If you’re saving but not paying down your debts it may be time to reconsider
We’re always being told to save, save, save. And this is, in theory, best practice for your financial future.
However, if you’re paying interest on your debt then you could actually be losing out. With interest rates as they stand, the rate you pay on almost all credit agreements will be higher than the rate you receive for any savings. So it might be worth considering using some of your savings to pay off your debt as you could be better off overall.
3. It will prevent any future problems
Even if you’re happy with the amount you’re paying each month now, it’s hard to know what the future may hold. If your personal circumstances change, your debts may suddenly become a little harder to manage. Doing what you can to lower your debt levels while you're able to, could help put you in a more secure position.
4. It’s good for your health and wellbeing
Even if you don’t like to think about it much, debt (and money generally) can be pretty stressful, with one in six Brits reporting to have suffered from stress and anxiety because of money concerns. If you can reduce your debts it could help lift some of this weight off your shoulders.
For example, you might find it pretty impossible to buy a house without a mortgage and making small purchases on a credit builder card to improve your credit score, can help you financially.
Step 2 – Work out where you stand
Now you’ve decided to focus on your debt, the next stage is to take stock of how much you have. This will help you get a much clearer picture of your financial health (and whether your debts might be a concern or not), making it easier to work out a plan of how to crush them.
Write down all your debts in a list.
This includes credit cards, outstanding loans, or any overdraft balances you have. You could also include your mortgage, but while overpaying your mortgage can help you pay it off more quickly, it isn’t necessarily right for everyone. You can read more about this in our article.
If you’re not too sure who you owe or how much you owe, check your credit report. It shows most of your outstanding debts at a glance. Make sure you check with all three credit reference agencies, Experian, Equifax and CallCredit as they all hold slightly different information on you. Don’t forget to list other debts you might have, such as loans from family and friends.
Calculate how much you owe and what interest rates you’re paying.
Check online or contact your lenders directly to get an up-to-date figure on your outstanding balances. Write these figures down alongside what interest rate you’re paying for each agreement. It’s important to know which debts are costing you the most – store cards tend to have very high interest rates, as do short term loans.
Even if you’re pretty sure of what you’re paying, it’s worth double-checking as you may have come to the end of an offer period and be paying a higher rate than before.
Work out how long it’s going to take to pay off your debts at your current pace.
This step will help you decide how much you want to invest in paying off your debts - seeing an exact date in the distant future can be a good motivator to paying it off earlier. Who wants to wait until 2025?
As credit card debt can vary, figuring out the interest (or how long it might take to clear your debt) can be tricky. The Money Advice Service has a calculator that works it out for you.
Step 3 – Reduce how much interest you’re paying
The best way to double down on your debts is to try to reduce the amount of interest you are paying by:
Getting a balance transfer card
These cards usually charge a very low - or in most cases - 0% interest rate for a set period of time. This allows you to move your existing debts onto one new card, and pay it off at the lower rate. By having all of your debts in one place it can be easier to track your progress and means you only have one payment to worry about, rather than several.
Shuffling your debts around
If you can’t get a balance transfer card, or the credit limit you're offered isn’t big enough to transfer all your debts, then you could still make your debt cheaper by moving it around.
You can try transferring your most expensive credit card balances (i.e. the ones where you're paying the highest APR) to a card with a lower APR. Just make sure to check for any transfer fees, which may mean it's more expensive to switch. If you have a loan, it may also be worth seeing if you can save by getting a cheaper loan rate with your current lender, or consolidating your debts.
Talking to your lender
If you don’t ask you definitely won’t get. Whether you’re struggling with repayments or just want a better rate, there’s no harm in talking directly to your lender. They may be able to offer you a better rate - especially if you're planning on moving several debts over to one lender.
Step 4 - Pay down your debts
Once you've brought down the cost of your debts as much as you can, you'll be in a much better position to starting paying them down.
One way to do this is to focus on paying highest interest debts first – even if this means paying only the minimum payment on any other debts. This is the most cost efficient in the long run as you'll pay less interest overall. Alternatively, if you know you stay motivated by ticking things off your list, you could focus on paying off the debt with the lowest balance first. This can help you get those small victories that can make a big difference to your motivation.
What if you’re struggling?
If you think you might have trouble paying off your debts, don’t panic. Call the National Debtline or debt charities like Step Change or the Debt Advice Foundation as soon as possible for free, expert advice on how best to tackle your debts. You can also read 8 more ways to help get yourself out of debt here.