As bills and credit card statements keep piling up on doormats, many people panic about running up debt problems. Follow our simple 10 step plan for a debt-free 2016.
Times are tough for families right now. But whatever your financial situation, it’s never too late to take control of your money.
It’s never too late to take control of your money
Here’s how to avoid getting stuck on that debt treadmill.
1. List all your debts
List all of your debts and who you owe them to. Also, write down how often you need to make repayments for each debt and what the interest rate is for each one. Don’t leave any out.
It sounds like a horrible job, but actually having all your debts listed in one place takes the fear out of them. Once you know the size of the problem – no matter how big it might seem – you can start to tackle it.
List every debt – don’t leave any out
2. Make a budget
Think making a budget is hard? It couldn’t be easier and it will only take you around 30 minutes and then you’re done.
Making a budget will help because it will:
a) Show you how much you can afford to repay on your current debts
b) Show you where you can make cutbacks and savings
c) Cut down money stress by stopping you running up further debt
If you find that your debt repayments account for more than 20% of your monthly income after tax, that is getting too high for comfort. If you find yourself in this position, either re-budget by cutting back on unnecessary expenses, move your debts to a cheaper credit card or loan (see below), or think about getting free professional debt advice from organisations such as the Citizen’s Advice Bureau or the National Debtline.
3. Organise your debts by their rate of interest…
The best way to organise your debts is not by their size, but by their rate of interest.
List your debts in order of the rate of interest they charge, and concentrate on paying off the loan with the highest APR first (making just the minimum repayments on the others). Once that’s been paid off, move onto the next most expensive debt on your list, and so on.
Paying off your debts in this manner will save you a fortune in interest payments – hundreds of pounds in some cases.
4. …but don’t forget ‘priority debts’
While you should definitely pay off your debts in order of interest, make sure you cover yourself when it comes to ‘priority debts’. These are debts that carry serious penalties if you don’t pay them.
Priority debts are things like:
- Rent/mortgage payments
- Electricity/water/gas bills
- Council tax
- Inland Revenue payments
5. Don’t save if you’re in debt
Saving is normally a good thing – except when you’re in debt.
It usually makes more sense to use your savings to pay off or reduce your debt.
For example, say you have £2,000 debt on a credit card charging 19% interest. You’ll be paying £380 interest to the credit card company every year.
Now imagine you also have £2,000 savings. Even in a decent account, at the moment, you’ll struggle to make more than £60-£80 a year in interest – at most.
So, you’d be at least £300 a year better off if you used your savings to pay off your debt – saving you a fortune on interest payments.
After all, there’s little point in having some savings grow at a trickle while money is gushing out of your account just to pay off the interest on your debt.
6. Get a cheaper loan or credit card
You can save a lot of money on interest payments if you switch to a cheaper loan or a cheaper credit card.
It’s worth considering shifting your debts onto a decent 0% balance transfer credit card. Right now there are cards on the market that offer up to 25 months at 0% – which means that you pay no interest on any debt you move to that card for 24 months. This can save you literally hundreds of pounds in interest payments.
But there are things to watch out for with 0% credit cards:
- Balance transfer fees: Most 0% cards have a one-off charge when you transfer debt onto the card (the ‘balance transfer fee’). This is usually between 1%-3.5% of the debt’s value – so make sure you take this charge into account.
- Pay off your card before the 0% period ends: Make sure you pay off your debt before the 0% period ends (or shift your debt to another card) – otherwise you’ll get hit by high-interest charges of between 16%-25%. Put the end date of the 0% period in your diary.It’s also worth setting up a Direct Debit to make sure you don’t miss a credit card payment.
- Check your credit rating before applying: To get the best cards on the market, you need a decent credit rating. (Your credit rating is what the banks use when deciding whether to lend you credit or not). If your credit rating isn’t good enough, the very act of being rejected for a card puts a black mark on your credit record – so don’t apply for a card unless you’re confident you’ve got a good enough rating! You can check your credit rating for free here, and find out how to improve your credit rating here.
And last but not least… balance transfer cards are great for paying off debt but don’t use them to spend. This is because most balance transfer cards charge high-interest rates on spending – if you don’t repay all your spending each month, you will probably pay around 17% interest.
If you need a credit card for spending, use a 0% purchase card instead.
7. Make sure you’re getting what you’re entitled to
Are you receiving all the income and help you’re entitled to? Literally billions of pounds worth of benefits go unclaimed every year. In particular, make sure you are getting all that you are entitled to when it comes to things like childcare, housing benefit, Council Tax benefit and heating grants.
Or use this handy benefits calculator to work out what you are able to claim. It’s worth taking the time to check as it can make a real difference to both your debt problems and your overall quality of life.
8. Review your mortgage
If you have a mortgage, it’s likely to be your biggest expense each month – so you want to ensure you’re on the best possible deal. After all, if you’re willing to shop around to find the best prices on things like books, CDs and clothes, it makes sense to shop around for the really big things, too.
Talk to an independent financial adviser about your remortgaging options. If it turns out there’s a deal that can save you money, then switch.
Remember to take into account any transfer charges and legal fees when switching. But even with these costs, you may find that you can still save a considerable amount of money by switching – which will make a real difference to your bank balance each month. Find out more about remortgaging.
9. Contact your creditors
If you’re struggling to keep on top of your debts, contact your creditors and explain your situation. Creditors will often be quite sympathetic and try to help you out. (This is partly because they’d much rather you take a bit longer to pay off your debt than default).
Ask them if you can stop paying interest and charges on your debts while you work out how much you can afford to pay (this is known as ‘freezing the interest’).
If you engage with your creditors and let them know you want to pay off your debts (and are not just ignoring them) then they will usually work with you and put off any further action (such as going to court) while you work out a mutually acceptable repayment arrangement.
Start negotiations with the most urgent debt, but don’t offer all your income to one creditor. Never feel pressured to sign up to payments you can’t afford.
Keep a note of all telephone conversations and meetings. Make a note of who you spoke to and what was agreed, and follow up these conversations with a letter confirming what was agreed (always keep a copy of these letters for yourself).
If you need help with negotiating with your creditors, there are some excellent free services available (see below).
10. Get free professional help for your debt problems
Don’t ever pay for debt advice (many debt management companies don’t have your best interests at heart). There is plenty of excellent free help available:
- Citizen’s Advice Bureau (find your nearest branch)
- StepChange debt charity
- Debt Support Trust
- National Debtline
These organisations offer really useful practical advice as well as a sympathetic ear, and help you put together a debt management plan for your debt problems if you still find yourself struggling.