Many of us use debt to hold things together: paying the minimum on our credit card or splashing out a bit on birthdays, Christmas and holidays.
But if you find yourself in a position where the amount of debt you have is becoming overwhelming, and you’re starting to use debt to pay off other debt, there are a number of steps you can take to start getting your finances back on track.
Making a plan
Jamie Smith-Thompson from investment specialist Portafina says establishing a plan to get yourself on track means being clear about priorities.
He says it’s best not to target your biggest debt, or the one that chases you most relentlessly. Instead, you should focus on the debt with the highest interest rate.
“Clear this first and you will have the money that was being swallowed up by interest to go towards any other outstanding debts. If you’ve ranked your hit-list highest interest rate to lowest, you will find yourself with more disposable money each time a debt is cleared,” he says.
Just remember to keep up with the minimum repayments on your other debts.
Tip: If you can, move your credit card balances to a 0% balance transfer card*, which will allow you to avoid paying interest for more than two years in the very best cases. Be aware you will have to pay a transfer fee, and try to clear your balance before the 0% deal ends.
The best deals are reserved for those with a good credit rating, but our Eligibility Checker will help you to see the cards you’re most likely to be accepted for, without harming your credit rating. Plus, our Credit Monitor app provides free access to your credit score and report, as well as tips and insights that might help you improve your score.
* Representative example: If you spend £1,200 at a purchase rate of 19.9% (variable) p.a. your representative APR is 19.9% APR (variable).
Some debts are more important than others
The financial pressures from every day bills, can quickly mount – even more so if a partner has recently moved out or you’ve lost your job.
But there are certain payments that should take priority over others as they have more serious consequences if you can’t repay them.
The most important payments are those that protect the roof over your head – ie your mortgage or rent.
If you have a mortgage, but are concerned about how you’ll manage to keep up with your repayments, it’s best to contact your lender straightaway as most will be happy to negotiate a cut-down monthly payment as long as you commit to keeping up regular payments.
You can read our article to find out more about what to do if you’re struggling with your mortgage payments.
If you’re renting, get in touch your landlord. They will probably ask you what you plan to do to get back on track, so it can be a good idea to draw up a budget.
If you’re struggling to cope with rent because your housing benefit has been reduced, some councils will help with discretionary payments. Contact your council for more information.
Tip: If you’re renting and considering downsizing to a smaller place to trim costs, multiply rent by 52 and divide by 12, rather than multiply weekly rent by four. If a property costs £250 a week, this makes rent £1,083.33 a month, not £1,000.
Other so-called “priority debts” include:
- Council tax
- Any fines
- TV licence
- Energy bills
All of these should be paid ahead of credit card or loan repayments as they have more serious consequences if you can’t keep up with your payments.
What about IVAs?
If your debts are significant, you could consider an individual voluntary agreement (IVA) - an agreement to pay your debts at an ‘affordable’ pre-agreed rate.
Citizens Advice says an IVA might be an option if you have at least two separate debts that add up to more than £10,000 and you have at least two different creditors.
“An IVA usually involves paying a set amount to your creditors each month and it will last for a number of years, normally five. You should be prepared to commit to paying a set amount throughout this time.”
But if your income’s patchy or you’re on a fixed term contract, an IVA might not be a good idea. IVAs can have high admin costs at the start (which are absorbed into the monthly repayment fee).
Jamie Smith-Thompson warns that IVAs can impact the rest of your life and are generally best avoided. “If you are serious about tackling your debt, start by looking at the reasons why you are in this position or are finding yourself over-stretched in the first place.”
Tip: IVAs have to be set up by a qualified insolvency practitioner and fees can be as much as £4,000 - £5,000 on average. Alternatives include a debt management plan or a debt relief order.
Where to get help
For many, debt can have a big impact on mental health. Letters from lenders and credit agencies – even councils – regularly use highly officious language and can be very unsettling.
If you receive a letter like this, take a deep breath and try to stay calm.
There are several charities that offer free debt advice and support, so if you are at all concerned about your debts building up, don’t be afraid to reach out for help.
These charities exist to give independent and non-judgemental advice. They can speak to your lenders for you, support you if you’re being harassed by debt collectors, and create personalised and manageable debt repayment plans.
National Debtline offers free, independent help over the phone. You can call its helpline on 0808 808 4000 Monday to Friday 9am-9pm, Saturday 9.30am-1pm pm
The Debt Advice Foundation (DAF) is an education charity offering free, confidential support and advice to anyone worried about debt. There’s an emphasis on self-help and it advises on IVAs and debt relief orders.