Read our guide to seeking free advice and paying off what you owe.
Britons bearing the brunt of significant debts should make getting back into the black their main goal. Debt is a rapidly expanding problem in the UK.
At the end of October 2018, personal debt across the country had reached £1.613 trillion, with the average consumer credit borrowing amount at £4,140 per adult. But such is our fondness for spending beyond our means, the Office for Budget Responsibility (OBR) now anticipates that household debt is set to reach an eye-watering £2.551 trillion by 2021.
Whether your debt is in the early stages of spiralling out of control or if you are already deep into the red, there are steps you can take to get back on track.
Don’t keep it to yourself
If your debts are keeping you awake at night, do not suffer in silence. This action in itself is often the first step and can be the source of much relief. Frank Hobson, policy and communications officer at the Money Charity, says: “Things that are hidden seem to gain a power of their own; bringing them out into the open is not easy, but it does remove the hold debt has on you. Your friends and family will almost certainly have realised that something is not quite right – they will probably be relieved to know that it is something that can be fixed."
Face facts - deal with debt head-on
Your first port of call is to work out exactly what you owe and to whom. Then you need to triage your debts; in other words, look at which are the most urgent debts you need to pay off. In terms of a pecking order, this means in the first instance getting to grips with your secured loans, such as your mortgage.
This also includes looking at any tax – including council tax – as well as utility bills and any court fines. This is hugely important, as while you want to ensure that you keep a roof over your head, you also need to make sure you do not get hit with any fines, or worse, prosecution, which will impact your ability to earn a living.
Consolidate your debts
If you can get a loan, do so and consolidate your debts into it, as it will allow you to take better control of the situation and focus on one monthly payment. Luckily, a price war has broken out between lenders and, as a result, personal loan rates are the lowest they have ever been. For example, at the time of writing the current best buy for a £10,000 loan comes from Sainsbury’s Bank and Cahoot(a subidiary of Santander), both of which charge 2.8% APR representative.
This means your monthly repayments would be £178.64 and the total amount repayable would be £10,718.40. With most loans remember though, if your credit rating has gone off track, you are likely to have to pay a higher rate.
Cut back on savings and non-essentials
If debt is beginning to feel like a noose tightening around your neck, there is no point in saving, as the interest you will be earning will be nothing in comparison to the interest building up with your creditors. If you have money set aside, use it now to pay off what you can on your most expensive debts.
Look at your lifestyle, too, as there are numerous ways you can boost your ability to put more cash in your pocket and help you slash your debt sooner.
Quitting smoking, cutting back on expensive shop-bought coffees or bringing your own lunch to work could save you a fortune over the long run. In addition, get rid of luxuries such as expensive television subscriptions, as no amount of entertainment will ease the stress of having debts.
Check your credit cards
If you have managed to rack up a substantial amount of credit card debt, you are not alone. Recent research from City watchdog the Financial Conduct Authority found that more than two million people have defaulted or are in arrears in terms of their plastic spending.
However, there are a number of credit card providers currently offering 0% balance transfer deals, so if you are paying a hefty amount of interest on your current card it’s worth switching. But bear in mind the best deals are typically reserved for those with a good credit score.
While there are balance transfer deals offering up to 32 months interest free, it may not always be the best option to go for the absolute longest 0% balance transfer period if you are comfortable repaying over a shorter timescale.
For example, the 33-month 0% balance transfer deal from MBNA comes with a one-off balance transfer fee of 1.99%, yet a 27-month 0% deal from Santander has no such fee at all. For someone switching a £5,000 balance, the saving on the balance transfer fee amounts to £99.50 – so it is worth thinking about.
Get a better utility bill
Gocompare.com highlights that by switching energy supplier, people could make significant savings as there are a range of very competitive tariffs available at the moment. The cheapest fixed deal that’s currently available is the Utility Point Up Energy Saver tariff which costs £902.66 a year.
Ofgem estimates that the average annual energy bill is £1,221, meaning that customers could save as much as £560.66 a year by switching to a better deal.
Switch your mortgage
If you are in the position to do so, take a look at changing your mortgage. While it is likely to be expensive to buy your way out if you are in the early stages of a new deal, if you are on a standard variable rate (SVR) you should definitely consider switching.
For example, take changing from an existing mortgage charging interest at 3.5% to a five-year remortgage best buy from Nationwide at 2.19% with no product fee (maximum 65% loan to value), on a £150,000 balance with 20 years’ total term remaining.
At 3.5%, you would be paying £870 a month but at 2.19% it would fall to £772 a month, or £98 less a month. Over the five-year term, the saving would be ££5,880 better.
Speak to your creditors
If your situation is severe, it is essential that you speak to your creditors as soon as possible and get some free debt advice, too. Be honest, as some firms may allow you to negotiate a fresh repayment scheme – at the end of the day they are more interested in getting their money back than seeing you go under. Depending on what you owe, some companies may freeze any outstanding charges or offer you a repayment break to allow you some breathing space.
Peter Tutton, head of policy at StepChange Debt Charity, says: “Half of our clients waited over a year between starting to worry and actually taking debt advice, but trying to battle through can make the problem much worse. By being open and identifying that they are struggling, people can start to recover by taking free debt advice and speaking to their creditors.”
Consider a debt management plan
Depending on how deep in debt you are, you could consider a debt management plan (DMP), which can be helpful, especially if you have had trouble getting a consolidation loan. Firms offering these schemes will contact your creditors for you and make arrangements to help you manage what you owe, allowing you to pay off your debts at a more affordable rate.
While many debt management firms offer such a service, they tend to charge a fee, but DMPs from StepChange, for example, are free.
Freeze your debts
If your situation has become quite dire and you want to avoid bankruptcy, you could apply for an Individual Voluntary Arrangement (IVA) – a legal agreement between you and those you owe – but to get one, you need to show you have a regular income. When you take out an IVA, your debts are frozen, thereby helping you to pay them back over a set term, usually five to six years.
While you can use an IVA to pay back the likes of personal loans, credit cards and overdrafts, you cannot use it to pay off your mortgage and other debts secured against your home.
Opting for this route will naturally hit your credit score, and your rating will be affected for some six years from the date it is agreed. It may also impact your terms of employment, so ensure this route is right for you before you agree to anything.
Try to avoid bankruptcy
Bankruptcy, or sequestration in Scotland, should be your very last resort, and this route should only be taken if it would otherwise take years for you to get back in the black.
While it will wipe out your debts and give you a fresh start, your credit rating will take a battering. Your possessions, including your home, could be included as part of the deal and, again, there could be implications for your career: you cannot, for example, be a company director if you have been declared bankrupt. As such, ensure you get professional advice before agreeing to a bankruptcy deal.
Where to get more help?
If you need debt advice, there are a number of charities you can contact, including:
England: 03444 111 444
Wales: 03444 77 20 20
Scotland: Cas.org.uk/0808 800 9060
Debt Advice Foundation
0800 043 40 50
0808 808 4000
StepChange Debt Charity
0800 138 1111