How crisis has given many the chance to clear debts

EVEN before the pandemic, millions of people were living in the red and overspending every single month.

January figures from the Money Charity show the total unsecured debt per adult was £4,264 with an average of £1,369 on credit cards

At an average 20.77% interest it would take more than 26 years to clear that card debt, repaying just the monthly minimum.

Research from financial services firm Hargreaves Lansdown shows that of every 20 people quizzed at least one spent nearly a whole month living beyond their means.

And a sixth were already at their wits end over their debts before the pandemic hit.

Sarah Coles, the company’s personal finance analyst, says: “Hovering on the edge of debt is stressful enough even in normal times. But when something goes wrong, it becomes incredibly easy to tip from just-about-managing to not managing at all.”

Yet the Covid-19 crisis has had a bad side AND a good side too when it comes to debt.

For some, cuts in income have meant maxing out on it. For them, this is a time to take stock and assess how to stop things getting worse.

But for the millions who kept their income and saw their outgoings drop dramatically, it’s been an unusual opportunity to get back into the black. Sarah adds: “If you’re lucky enough to be in this position, you could change your relationship with debt forever, building a safety net so you can stay one step ahead of whatever life throws at you.”

It’s going to be harder to spend less now you’re free to go shopping and socialising again, so you need to work a bit harder at it.

Make a list of everything coming in each month, and everything going out. See where you can cut costs. Don’t stop all the treats – just work out which ones you really enjoy and those you can live without.

The aim of a budget shouldn’t just be to make ends meet, but to have some cash left over each month. This should go into paying your expensive debts down.

While you’re going through the process, it’s usually a good idea to move your debt somewhere with as low an interest rate as possible

– to cut the amount you’re wasting in interest each month. Since the crisis, it’s become harder to borrow, so your options are more limited – but there are still better deals shopping around, even if it’s an interest-free overdraft buffer.

Check out 0% balance transfer credit cards and personal loans for a more structured way to clear your debt.

There’s no point in working hard to pay it all back if you’re still prepared to run up debts.

If this is going to be a lifelong change, you need to grit your teeth and commit to steering clear of needless debt for good.

Once your debts are paid back, switch your direct debit into a competitive easy access savings account, to build up an emergency savings safety net.

You should work towards having three to six months’ worth of expenses in this account.

That way, when you’re hit by the unexpected, you have savings to turn to and can stay out of the red.

If cutting costs isn’t enough to make ends meet, you should also look at what you have coming in, and whether you qualify for any help from the Government.

If you don’t know how to navigate the landscape, there are charities out there with brilliant help and information available, like Turn2Us.org.uk and Stepchange.org.

And if you’re still falling well short, one option is to take a payment holiday on your debts.

The Government introduced three-month holidays at the start of the crisis, and has extended them to six months for those who really need them – provided they’re in their best interests.

However, this isn’t necessarily the right approach. At the end of the ‘holiday’ you will be more in debt, and your repayment costs will be higher.

It’s also likely to affect your ability to borrow in future.

If you have such significant debts that you can’t get back in control, it’s worth getting help with them instead.

Debt charities like StepChange or National Debtline (0808 808 4000) and Citizens Advice offer free debt advice.

They may be able to help you set up a repayment plan – and arrange for interest on your borrowing to be frozen while you repay it.

Alternatively, if things have got more serious, they can explain all the options you have, and help you come to a decision about the best way forward.