Debt can be crushing, both to your finances and also to your morale. Additionally, a failure to meet your debt payments will affect your credit score rating which may make it impossible for you to get on the property ladder in later years. Most people, therefore, would agree that it's desirable to pay off debt. The difficult part, though, can be working out how to get out of the debt spiral. The good news, however, is that there are some basic and practical steps that you can take to alleviate your debt position and which, with a little discipline on your part, will set you on your way to paying off your debt.
Confronting the reality of your indebtedness:
The first step towards dealing with your debt is to recognise that you have a debt problem and to identify just how much you owe and across which types of debt it is spread. The main debt categories (or debt instruments) are credit cards, personal loans, overdraft and mortgage. It might seem very obvious to say that someone has to sit down and identify the debt that they have. However, for many people who get into debt, there is a reluctance to confront the stark reality of the financial mess that they have slid into. Hiding from a problem, though, never makes it go away.
Budgeting to identify how much you can repay:
You should also review your last three months bank statements, looking at your monthly incomings and outgoings. This should help you to identify whether there are any cost savings that you can achieve to increase the amount of money that you have available to pay off your debt. It should also give you an indication of the total monthly amount that you believe you have available for debt payments. There are often major cost savings that can be identified and one part of this is to review your utility bills. Switching to lower cost companies may shave a significant amount of money off your monthly bills.
Debt Prioritisation:
If you can afford to pay off all your debt in one go, then that is ideal. However, the reality for most will be that it will take a much longer period of time to get out of the red. The basic principle, though, is that you should pay off as much as you can possibly afford to. At the very least you will need to meet your mortgage payments (if you have a mortgage) as your mortgage will have been secured on your house.
Having ensured that the mortgage is covered, it's also important to be aware that most personal loans require a fixed monthly payment. With credit cards and overdrafts, however, you have more flexibility in terms of when and how much you pay back. The key is to target the debt types that have the highest interest rates. For example, if your credit card charges 10% and you're paying 24% on an overdraft, then it's a no-brainer that you should prioritise the overdraft. Unauthorised overdraft also usually incur hefty bank charges, which is another thing to take into consideration.
Actions to alleviate your debt:
Here's a list of options that you could consider to reduce your debt burden:
- If you're in an unauthorised overdraft position, speak to your bank to see if they will extend your authorised overdraft limit. Authorised overdrafts tend to have much lower interest rates than unauthorised overdrafts and incur less charges.
- Consider switching to lower cost credit cards/overdrafts/loans/mortgages. If you found that your savings were in a savings account that was paying an uncompetitive rate of interest, the chances are that you would waste little time in switching to another savings account. The same principle applies for lending products. Of course, your ability to switch will be dependent on a credit score decision but it can pay off to approach a company who is offering market-leading lending rates. Switching to lower cost options will immediately reduce your monthly payments and may enable you to pay off your debt considerably quicker.
- Consider consolidating your credit card and overdraft debt onto a personal loan. Typically, loans have lower interest rates than credit cards or overdrafts, so this can be another way to reduce your monthly debt payments. Of course, the downside is that loans have fixed payments so you must be confident that you won't miss payments.
- Where possible, pay off your monthly credit card debt in full each month. Perhaps the single biggest trap that people fall into is just paying off the minimum amount that the credit card company specify. By paying only the minimum, you end up paying interest both on the balance and the interest, meaning that the amount you've borrowed takes much longer to pay off and ends up being much more expensive.
Debt repayment and cost savings discipline:
Some of the measures outlined above can help to reduce your immediate debt payments. However, in order to eliminate your debt you will need to be disciplined in your approach to your finances. Firstly, you should seek to spend as much as you can comfortably afford to on paying off your debt. And, secondly, having started to pay off existing debt, it's vital that you don't incur fresh debt. This may mean a change in lifestyle so that you begin to live within your means.
Focus on the end game a better future for you:
There's no getting away from the fact that paying off debt and being financially disciplined can be painful and you may sometimes wonder if there's any light at the end of the tunnel. However, a very powerful tool in the fight against debt is to have a vision of the future that you are working towards. Maybe your dream ultimately is to be able to put money into a savings account to save up for a dream holiday? Or maybe you are thinking of the day when you'll be able to retire to that cottage by the sea? Whatever, the better financial future that you're striving towards, keeping it in mind can help you to remain motivated and speed up the rate at which you clear all your debt.
You're not alone and others have made it through:
It's worth remembering that you are not alone in being in debt. Sadly, there are large numbers of people across the world who are in debt. The good news is that many of them have successfully gone onto repay all their debt. With a little planning and some hard work, you can be a success story too.
Finally, if you find that, even with your best efforts, you're still drowning in your debt, then don't despair. They say that a problem shared is a problem halved and this is certainly true in relation to being in debt. You may have a local Citizens Advice Bureau that may be able to offer guidance. Alternatively, it can be beneficial to speak to your bank. It's not to your bank's best interests to have customers who can't keep up with repayments and they will often be sympathetic where people are open and honest with them and they may be able to offer solutions (such as debt consolidation) that will help alleviate the difficulties you are facing.