8 simple ways to get out of debt
AS PERSONAL DEBT HITS A NEW HIGH AND INTEREST RATES LOOK SET TO RISE, TRICIA PHILLIPS FINDS...
WE NOW owe a record £1.5trillion in debt – and that’s before we take into account the spending on plastic over Christmas. Repayments are affordable now – but inflation is rising, pushing up the cost of everyday essentials, and the base rate is expected to start rising too, pushing up interest rates.
This could leave many people struggling to make ends meet and keep up with debt repayments.
Andrew Hagger of personal finance site Moneycomms.co.uk, says: “It makes sense to look at your outgoings right now to see if there is any way you can reduce some of your payments.”
Don’t wait until it’s too late and you end up in spiralling debt – follow our eight-step plan to help you ditch that debt.
1 KNOW WHERE YOU STAND
GET all your statements together – credit cards, loans, store cards, bank. How much do you owe on each, what are the monthly repayments and how much interest are you paying?
Adding them up can be a sobering moment as many people never look at overall debt and what they pay each month to service it.
2 DO A BUDGET AND STICK TO IT
LIST all income – salary, pension, benefits, interest on savings or investments – in one column. Then list essential bills – mortgage/rent, council tax, energy bills, fares to work and food. Add in every other outgoing – insurance to car tax, phone bills, TV package, holidays, clothing and birthdays.
Go through each and see if you can ditch any, cut back or switch to better deals. Work out what you have after paying bills so you can see what’s left to pay off the debt.
Consider making extra cash by flogging stuff you don’t use or need.
3 DON’T TACKLE IT ALL AT ONCE
FOCUS on the debt with the highest interest rate as you will free up the most cash to get everything else paid off more quickly. Set up direct debits for other debt to ensure you pay at least the minimum each month and on time and don’t get caught by late-payment fees.
4 TRY TO SWITCH EXPENSIVE DEBT
THERE is more than £63bn owed on credit cards in the UK, an average £2,469 per household, according to the Money Charity.
If you have a £2,000 balance on a credit card at a market average rate of 18.9% APR, and only make the minimum repayment of 2.5% each month, it will take 26 years to clear and cost you £2,976 in interest.
Switch that balance to a 0% balance transfer deal, such as MBNA’s 43-month card, and pay £48 per month and you will clear the debt in the 43 months.
You’ll pay a one-off 3.29% fee of £65.80, but currently they give you £20 off if you switch your balance within 60 days of taking out the card. So it will cost you just £45.80 to clear the debt – saving £2,930.20 in interest.
Andrew Hagger says: “If you’re looking for a 0% balance transfer card don’t automatically plump for the longest term as the balance transfer fee will be higher.
“Work out how long it will take you to clear your balance and pick a 0% card with a term that matches what you need. For example, if you can clear your balance in 26 months you can now do so without having to pay a balance transfer fee at all.”
If you have more than one debt, consolidating it into one personal loan will give you a structured way to repay debt. But you must cut up cards and cancel overdrafts to stop you rebuilding more debt.
You can find £5,000 loans at rates from 3.7% over a three-year term.
Here are some options:
0% BALANCE TRANSFER CARDS
MBNA: 43 months – 3.29% fee – £45.80 to transfer £2,000 (with £20 cashback) Virgin Money: 40 months – 1.79% fee – £35.50 to transfer £2,000 Barclaycard: 32 months – 0.63% fee – no cost to transfer £2,000 (£20 cashback) Halifax: 26 months – no fee – no cost to transfer £2,000
PERSONAL LOANS – £5,000 OVER 36 MONTHS
Hitachi Personal Finance: 3.7% – £161.50 monthly repayments
Cahoot: 3.8% – £161.74 monthly repayments
M&S Bank: 3.8% – £161.74 monthly repayments
5 OVERPAY YOUR BILLS
IF A poor credit rating prevents you from being accepted for a 0% balance transfer card, you can cut the repayment time and the amount of interest considerably by paying a little extra. £20 per month above the minimum on a £2,000 balance at 18.9% APR you would clear the balance in five years and pay just £932 interest. £50 each month will clear the debt in two years and 10 months and cost £469 in interest.
6 DON’T BUILD UP MORE DEBT
LIVE within your means. If you can’t afford something, don’t buy it.
Stop taking credit cards out with you.
Dump the store cards – they are expensive, often charging 30% APR plus. Unless you repay in full each month any rewards they offer will be wiped out by interest. If you really can’t stop spending on cards, cut them up.
7 FINISH WHAT YOU’VE STARTED
DON’T give up. Keep a record of how you are doing. It will help to keep you motivated as you see the figure for the amount of debt you owe going down. Imagine how you will feel when you are completely debt-free.
Then you can start saving for the things you want and for the future so you always have a financial cushion to fall back on and don’t need to turn to expensive credit.
8 DON’T STRUGGLE ALONE – GET HELP
IF YOU can’t take control and feel unable to make ends meet, get help immediately. The longer you leave it the worse the situation will get.
The sooner you get help the more options you will have to clear debt. There is lots of free, independent advice available.
Book an appointment with a debt adviser at your local Citizens Advice or visit citizensadvice.org.uk
Call the National Debt Helpline on 0808 808 4000.
Contact StepChange Debt Charity on 0800 138 1111 or via stepchange.org
PayPlan, 020 7760 8976 or payplan. com, can offer you free debt advice as well as a fee-free debt management plan.