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How to get out of debt for good this New Year

How to get out of debt for good this New Year

Got more debts than you think you can manage? Our money saving expert Andy Webb shares his advice for taking back control of your money

Most organisations would celebrate record numbers in January. Sadly the opposite is true for the UK’s debt charities, who see an influx of people in the new year.

Usually it’s extra Christmas spending that makes people go over the limit, but with the ongoing cost of living crisis, demand for help has been soaring month on month.

It means more and more people have been turning to overdrafts, credit cards and loans to get by—but these aren’t sustainable solutions. And they can quickly turn unmanageable, spiralling into problem debts and defaults.

But before that happens, these actions could help you take back some control, and prevent things from getting worse.

1. Get the whole picture

Sara Williams, who runs the Debt Camel website, says, “The starting point is to make a list of all your debts, what you owe, the interest rate and the monthly payments so you have all the facts.”

"The starting point is to make a list of all your debts, what you owe, the interest rate and the monthly payments"

It really is vital to fully understand your situation—so get all the paperwork out as a priority. It might be scary to acknowledge everything, but leaving it too long will end up being even scarier.

Hopefully this step will help you work out what you need to do and you can see a way out.

2. Use your savings

Woman putting coin into jar with another full jar of coins sitting to the sideIf you have savings, it will save you money in the long run if you use them to pay your debts off

Don’t forget to also take a look at your other accounts. If you have both debts and savings, you’re losing money.

Though savings rates have improved massively, in most cases they will still be dwarfed by the APR on cards and overdrafts. So you’re better off using your savings to clear those debts, or as much of them as you can.

It’s common for people to worry that this will remove an emergency savings buffer. But if an emergency comes along, you can borrow to cover those costs, and until it does, you can begin to build up more savings.

3. Focus on priority debts

Not all debts are equal. Some can have catastrophic consequences if not paid, so it makes sense to get these cleared first.

These are things like mortgage or rent (you could be evicted), car finance (your car could be repossessed), gas and electricity bills (you could be cut off) and council tax (bailiffs could be sent or you could go to jail).

"Not all debts are equal. Some can have catastrophic consequences if not paid"

Though you might not be able to clear them immediately, you can talk to each creditor you owe about the situation to agree how you’ll do it, which can prevent those bad things from happening.

4. Decide which debts to tackle first

Woman reading through debt bills and using calculatorDon't try to tackle all your debts at once—choose which ones you want to shrink first instead

After the priority debts are under control, you can begin to bring down any others, but don’t keep paying them off equally. Instead, pay the minimum on all but one, and focus on clearing that remaining debt with higher repayments.

“Some people like to pay off the highest interest rate debts first to save money. Others like to clear the smallest debt first so they see some progress quickly,” says Williams.

There’s no real right or wrong approach as both have advantages. Though the first method (sometimes known as the “avalanche”) cuts the total interest you pay, the second (called “snowballing”) might help you a bit psychologically.

5. Try to find more cash

You’ll want to put as much as you can towards your debts so they go down faster. That’s likely to be pretty hard, but if there are any ways you can cut back or switch to lower spending that you haven’t already tried, now is the time to do it.

"It’s worth seeing if there are ways for you to earn more"

At the same time it’s worth seeing if there are ways for you to earn more, whether through your existing employment, an extra job or a “side hustle”, such as selling unwanted items online.

Check if you’re able to claim any benefits too.

6. Transfer credit cards to 0%

If you have any credit card debts with monthly interest charges, see if you can get a 0% balance transfer credit card.

This allows you to move the debt from one card to another, except the new card won’t charge any interest for a set period.

The longest ones will come with a transfer fee of around 3%, though this will still be better than continuing to pay around 20% or 25%. If you can manage with a shorter deal, perhaps two years at 0%, then you might be able to avoid the transfer fee completely.

You’ll have to make the minimum repayments every month, but try to pay as much as you can to bring the overall debt down. Ideally you’ll want to clear it before the interest-free offer ends where possible.

Shop around via a comparison site to check your eligibility across a number of cards. If you can’t get 0%, even consolidating on a low-rate can always help.

7. Money Transfer for other debts

Person holding credit card while using laptop0% Money transfer credit cards inject some cash into your current account, which you can use to pay off urgent debts

Sadly, balance transfers only work for credit card debts. But there is another option called a 0% Money Transfer credit card.

These give you a lump sum to your current account to use as you wish, which makes them handy for catalogue debts and overdrafts that can often be as high as 40%.

These are 0% for much shorter times than balance transfer cards, and you will have to pay a 3-4% fee, and again you’ll need to repay
at least the minimum to the card each month.ˆ

8. Switch your overdraft

Another option for overdrafts is to move your current account to one with a 0% buffer. There are only a couple of these. Nationwide’s FlexDirect account offers 0% for 12 months, while First Direct has a small £250 buffer.

9. Get free help

If trying some or all of the above isn’t making enough of a difference and you can’t afford the repayments, then it’s wise to seek free and independent debt advice.

Some of the leading organisations that can help are Citizens Advice, National Debtline and Step Change.

Be very careful of similarly named organisations that might appear at the top of your online search results, and avoid any that charge you for debt solutions.

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