Over the last few years, there has been a tendency for people in the UK to develop a ‘buy now, pay later’ attitude. This has mainly been brought about because of the amount of cheap credit available.
According to recent data released by the Bank of England, Britons currently owe £72.5 billion on their credit cards. That is a huge amount of debt hanging around people’s necks. No wonder people are worried. Our debts increase even further once we start to include mortgages, overdrafts, and other loans into account.
Having significant amounts of debts is unsustainable in the long term especially if there is a downturn in the economy leading to job losses or if interest rates start to creep up again. As a nation it is no wonder more and more people are concerned and looking to see what they should do to get out of debt.
Table of Contents
- Review your debts
- Net monthly income and expenditure
- Increasing your income
- Reducing your debts
- Other ways to reduce your debts
Review your debts
Are you one of the many UK citizens that now find themselves in debt? If you are then you are not alone and it is time to try and sort out your debts. There is no point hiding all your debts in a drawer and hoping they will go away. Instead you need to face your worries and take action to reduce your debts.
So rather than ignoring your debts you need to pull out all your paperwork. Then go through each of your debts in turn and either enter these onto a spreadsheet or write them down on a sheet of paper. Either way you need to note down who you owe money to, how much you owe, when it is due and the interest being applied to your debt.
You need to this exercise for all your debts so include credit cards, store cards, mortgages, loans, catalogue debts, electricity bills, gas bills and any other debts you have.
Doing this financial exercise will give you a better feel for the debts you have and how you need to tackle these. The aim should be to reduce those debts charging the highest interest rates first and then work your way round to the other debts.
Unfortunately it is not as easy as that as some of your bills will be much more pressing. Your bank may be threatening to repossess your house, or the electricity company are threatening to cut off your gas or you need to buy food to feed your family.
Do not panic though you are not alone and recognising you are in debt is the first step on a path to getting yourself out of debt. It may be a long path with lots of obstacles in the way but you are at least on it and moving in the right direction.
Net monthly income and expenditure
Once you know how much debt you are in you need to calculate your monthly income and expenditure. Again, you need to write these down or use a spreadsheet to record these figures.
The first thing to do is to calculate your monthly income. You can do this weekly or annually if you prefer. You should include your wages after tax. This can be found on your pay slip or by by looking at your last bank statement.
You also need to note down any other money you receive such as Universal Credit, Tax Credits, Jobseeker’s Allowance, Child Benefit, Carers and Disability Benefits, rent, interest, dividends, bonuses and any other income you receive.
Next you need to identify all your monthly expenditure, such as, rent, telephone, rates, TV licence, electricity, petrol, groceries, loan repayments, and any other regular expenses you have. You then need to add together all these costs to identify your monthly outgoings.
Once you have listed all your income and expenses you should deduct your expenses from your income to see if you are in positive or negative position. If your income exceeds your monthly debts then congratulations are in order as you can afford to start paying off your debts.
Unfortunately for many people their monthly expenses are higher than your monthly income you need to take action now to sort out your debts. Otherwise things are going to deteriorate with your debts mounting up. You therefore need to somehow either increase your income or reduce your expenses.
Increasing your income
One way to help get yourself out of debt is to earn more money so that you can use this to repay your debts sooner.
Increasing your income is not easy but you could do this by asking your boss for a raise, taking on a second job or a side hustle. You can sell unwanted stuff on eBay or at car boot sales. Thanks to the internet there are lots of ways to make money online and to increase your net worth.
However, remember if something sounds too good to be true it probably is so be careful online and avoid anything that asks you to pay them an upfront fee as they should be paying you.
Reducing your debts
In order to get out of debt, you need to reduce your debts as quickly as possible.
One way of doing this is to transfer your credit card debt to another credit card provider who either offers an introductory interest-free free period or will charge you a lower rate than your current provider. An easy way of comparing credit card rates is to use a comparison site.
If you have any savings then it probably makes sense to use these to pay off your debts as this should save you money. For example, if you have £1,000 in a savings account earning 3% a year you will only earn £30 a year in interest.
However, if you owe £1,000 of debt to a credit card company they are likely charging you a higher rate so say they charge you 15% you are paying £150 of interest. Overall you could save £120 a year by using the money you have in savings to repay a chunk of the credit card debt.
You should also look into consolidating your debts by taking out a personal loan. This will be worthwhile if the interest rate of the loan is lower than that charged by your credit card company.
If you’re not in a position to do any of these things then it’s time to prioritise. You should aim to at least pay the minimum monthly repayments and then to use any spare money to pay off your debt with the highest interest rate.
Keep paying off your most expensive debt until it is paid off while making minimum payments on the others. Then pay off the next most expensive debt and so on.
You may think it is easier to pay off the smallest debts first, irrespective of the interest rate charged to make you feel better. However, you must resist this urge as it will likely take you longer to clear your debts unless the smallest ones happen to charge the highest interest rates.
Other ways to reduce your debts
Other ways to save money include cutting out and using coupons, using price comparison and cashback reward sites to save yourself money. You should always try to shop around when buying something so that you do not pay over the odds. Switching your mortgage, gas, electricity and mobile phone providers are all ways of potentially saving money. These can all be compared using price comparison sites to get you a better deal and save yourself some money.
You should also speak to Citizens Advice if you are struggling with debts. They can offer individuals more specific advice to help with their individual circumstances and debt problems. You should also check to see if you are due any other benefits by checking Entitled to.