How to Manage Your Debt
8.3 million people in the UK are in over their heads with debt (according to the National Audit Office). Are you one?
How to get out of debt
Being in uncontrolled debt is horrific. Not only are you constantly dealing with the feeling of powerlessness and worry, but you are typically also struggling with the finances in the rest of your life.
Debt can cascade, creating a hole that seems too big to climb out of. Thankfully, at Compare UK Quotes, we have some of the answers for you on how to get out of debt (we don’t claim to have them all, but some!).
1 – Understand your debt
So often, the response to debt is to hide your head in the sand and hope it’ll all go away. It won’t! If you are old school, get out a pen and a piece of paper (if you are more modern than that, then a spreadsheet or a simple notes app will do the job!) and write down all your debt – every penny. Knowing what you owe is the first step to solving it.
Take a step back and breathe. You can do this!
Now you know what it is, you can sort it all out.
2 – Prioritise your debt
Different debt has different priorities. Credit card debt, for example, often comes with higher interest rates than a bank loan, where a mortgage or rent arrears problem could lead to you losing your home. Put your list of debts in order of importance so that the funds you do have can go to the right places.
3 – Communicate
For most people, this can be one of the hardest stages, but it is so important when it comes to debt control. You must communicate with the people you owe money to. A lot of the time they may be able to help you, even if it is only to move a payment back a little bit or rearrange a direct debit. Sometimes, they will be able to sort out a completely new payment plan that’s a lot more affordable. Let them know you need help with the debt, and they will do what they can.
4 – Congratulate yourself on gaining some control
By this point, you’ve spent a long time on the phone and are looking at a list of payments that have to be made. You might not have paid anything off, but your debt management has gone up a whole notch.
It’s time to look at paying them back.
How can I clear my debts quickly?
Unless you have a sudden influx of money or have changed your life sufficiently to have more income, the chances are, you can’t simply clear all your debts. What comes next is a sustained campaign of good debt solutions.
1 – Organise your payments
You know what’s coming in and now you know what needs to go out. Look at your monthly budget and organise your payments to knock back those debts. Here are a few things to remember:
Pay your bills first – there’s no point concentrating on paying a off-one string of debts only to run up another new list. Make sure the regular stuff that you are on top of stays in good shape.
Follow your debt priority list – there’s a reason that you listed your debts in order of priority. Make sure you don’t get side-tracked and you stick to the list.
Pay more than the interest – if you just cover the interest on an account, you’re doing nothing to help the future you. Even if it is just a pound or two, try to push your payments into dealing with the capital of the debt itself. Over time, you’ll thank yourself.
2 – Look into debt consolidation
If your credit rating is good enough that you can get a bank loan for debt consolidation, then you should definitely consider it.
Having all your debts paid so you have one outgoing direct debit at a reasonable interest rate can help greatly. It’s important that you don’t make the mistake of sliding back into debt with credit cards, overdrafts and other avenues once you have the consolidation loan (which would simply double your debt!), but if you have the strength of will to do it, this type of payment plan can bring you a huge breath of relief regarding all your debts or money owed.
For more information on a debt consolidation loan, read our other articles on the subject!
3 – Debt juggling
If you can’t get a single loan to cover your debt but have access to multiple avenues of credit, you may want to spend some time considering how to effectively juggle your debt.
To juggle effectively, you need to understand what fees or interest rates you will be paying by using the facilities available to you, as well as making sure you know the timescales involved and when things need to be paid off by, but while moving balances from one account to another is not in any way a solution to debt, it can get you some precious extra time to pay and potentially save a lot in interest.
4 – Stop spending money
This should really be rule number one! If you are in uncontrolled debt, then you need to change your mindset subtly in order to become a true debt manager and that means curbing your spending.
Look at the money available to you as someone else’s, because truly that’s what it is. It isn’t your money – it belongs to the bank, the credit card company, the gas company, whoever. Not you. Only when all your accounts are in the black is that money truly and honestly yours.
By changing how you see money, you can help avoid unnecessary spending. You want a takeaway? OK, but should you take from your bank just to eat pizza? That new film at the cinema looks good, but would the council tax people really see it that way?
Give them back their money until you are in a position where the cash is yours – then you can splash out on whatever you want!
I can’t pay my debts – what options do I have?
Unfortunately, despite the best management skills in the world, sometimes, you simply don’t have the money to pay your debts. Circumstances change and often, a responsibility you took on when it all seemed easy is suddenly a huge weight.
1 – Communicate
The golden rule of sorting debt is to communicate. If you can’t pay someone the money you owe them, the first thing you must do is let them know. Don’t hide, don’t let days tick past, call them right away and inform them of the situation. Be honest and say, ‘help me with my debt, please!’
Only two things can possibly come from this:
They help you in some way
They do not help you and the situation is no different to how it was before you made the call
It’s impossible to communicate with someone to whom you owe money and have the outcome worse at the end than it was before you reached out to them. Unless, of course, you are hiding from them and they don’t know where you live…
(Hopefully, you are not in that position.)
Communication shows respect and often, that’s enough for them to give you the help you need!
2 – Do something you thought was unthinkable
There are often more options than you first considered. A lot of people hold on to debt for objects (mobile phones, leased cars and more) without thinking about returning the item, and still more don’t consider selling their things to pay for debt.
It’s easy to believe you have some sort of right to your situation, status and stuff, but the reality is that if the situation is very bad, you need to re-evaluate.
Here are a few things that many people wouldn’t consider, simply believing them ‘ridiculous’ or ‘extreme’, but all of which might help get you back on your feet:
Sell belongings – in a desperate situation, nothing is sacred. Courageous people have often sold their valuables to pay off debt, from cars to wedding rings.
Move home – downsizing is viable. Clinging to a house or a lifestyle that used to work for you with stubbornness could be your downfall. Consider moving to a different location where life is cheaper or simply looking at a smaller property in the same area. In extreme cases, consider moving back with parents or other family or friends to temporarily rid yourself of the burden of paying for a household entirely (but don’t overstay your welcome).
Ask for a pay rise – be honest with your work and say that you need more money. Really, the worst that can happen is they say no.
Change jobs, or get a second job – like moving home, changing jobs can often seem too radical for many, but if your employment doesn’t pay what you need to survive, then is it the right employment? Getting a second job might mean sacrificing your spare time or time at home with your loved ones, but if it is needed for a short while, it may be worthwhile. Think of it as a short-term struggle for a long-term gain.
3 – Look to the benefit system
Many people are too proud to even look, but when the need is great, pride may need to take a back seat. In the UK there are many benefits available for people, from housing benefit to tax credits and more and often, people find they are eligible for things they never knew they were! The national change to universal credit is intended to help consolidate all these different systems into one and with it comes new rules which may make eligibility tough, but it’s worth trying for!
Again, there’s nothing to lose by them saying ‘no’ except for your time.
4 – Look to a debt management plan
With some government support, a debt management plan is simply an agreement between you and your creditors regarding how you will pay them back. You can do this yourself if you are happy to negotiate or, if the situation has become too difficult for you to reasonably communicate, you can ask a third-party company to act on your behalf.
Many companies on the internet advertise debt management services and will offer to do this for you for a fee. It is important that before you engage with anyone in this manner that you check they are registered with the Financial Conduct Authority (FCA). Check their website here.
When you work out a debt management plan through a third-party company, you will be charged fees for their services – this is typically an initial fee plus another one for every payment made through them. If you have multiple debts, they can work with all of them for you, allowing you to make one payment to them each month and have them parcel out the needed funds to your creditors.
A debt management plan can provide a level of relief simply by knowing that everything is in hand and you won’t be receiving any more nasty letters in the post, but it can work out more expensive overall than simply handling the problem yourself.
5 – Getting help from friends and family
If you have family members or friends that can help you, then it may be worth approaching them for help, however, the level of conflict that this can cause (especially if something goes wrong) mean it should really be a last resort.
The best advice when approaching family or friends in this manner is to try to be as business-like as possible, separating the potential loan from any other relationship between you. Agree that it is not to be mentioned at social events (agreeing to communicate about the money only via email can help this) and that it won’t be used against you in any way.
Ridiculous though it can sometimes sound, it is worth writing up an agreement between you explicitly stating how and when you will pay back any money owed. You should then make sure you stick to this arrangement.
Money comes and money goes, but if you damage your relationship with someone you care about, it may be irreparable. Unless you are very confident in your ability to stick to any agreement you make, it is often best to consider personal relationships a no-go zone when it comes to debt help!
Can a debt be written off?
It is a typical thing to dream of a way where your debt just goes. No repayments, no problems, simply gone. ‘How do I get my debts written off?’ people ask, ‘what about the government debt help scheme?’
The truth is, despite some strong television and internet advertising, there is no time when debts simply get written off.
What there is, is insolvency.
What is insolvency?
In the past, insolvency had only one version: bankruptcy. Today, the government has set up ways to help people through multiple levels of insolvency: individual voluntary arrangements (IVA), debt relief orders (DRO) and full bankruptcy.
Each of these will:
Expect you to have exhausted all other avenues
Put a temporary (but sometimes long-term) mark on your credit record
Only be available to you if you have a very small amount of spare monthly income
Come with their own fees
Insolvency is not something you should look to as debt management help – it is a serious step to get you out of a debt crisis and it should be noted that often you will end up with no assets once the stages are complete.
Personal finance help with Compare UK Quotes
Whether you need to get out of a huge debt, want to learn more about loans or are interested in budgeting advice, at Compare UK Quotes we have a library of articles for you! Take a look at the many pieces on our website and improve your financial situation today.