Struggling to see light at the end of the tunnel? Follow some of these steps and you could be debt-free sooner than expected.
Being in debt isn’t unusual, in fact, in early 2019, the average amount of debt adults in the UK was at an all-time high - and it’s hardly surprising given how easy it can feel to get your hands on finance these days, not to mention how quick you can spend it.
But we understand the reality - being in debt that you’re struggling to get out of is no laughing matter. So, we’re here to give you 10 top strategies for paying off any outstanding credit.
1. Debt consolidation loan
If you’ve got multiple debts with multiple lenders (store cards, credit cards, overdraft etc.), you’ll be paying multiple interest rates on top of your balances. This means you could be paying more than you need to be, not forgetting how overwhelming it might feel.
And that’s where a debt consolidation loan comes in. It involves moving all your outstanding debts into one place by using a loan to pay off all your creditors, so you know exactly how much you owe, how much you’ll pay in interest, and how much you need to stump up each month to pay off the loan.
Tip: If you use a loan to pay off your credit or store cards, don’t be tempted to start spending on them again. If you do, you could find yourself worse off than you started.
2. Balance transfer Credit Card
A balance transfer works in much the same way as a debt consolidation loan, but instead of consolidating your debts with a loan, you shift the balance of your debts onto a balance transfer credit card.
Again, this comes with the bonus of having fewer interest rates and creditors to worry about because all your repayments will be in one place. These cards often come with an introductory offer for a certain amount of time (for example, 0% interest for the first 3 months) but then revert back to a standard variable rate.
However, the interest rates charged on credit cards can sometimes be higher than those on a loan, meaning you could end up paying more back overall.
Tip: Don’t assume if you have a less than perfect credit history you won’t be accepted for a balance transfer credit card or debt consolidation loan. There are companies who specialise in lending to people with a less-than-perfect credit record
3. Paying more than the minimum
It might sound like we’re stating the obvious with this one, but the more you can pay each month, the quicker you’ll clear your balance and the less you’ll pay overall in interest.
This one’s particularly relevant if you’re aiming to get out of credit card or overdraft debt pronto as it’s easy to chop and change how much you pay month-on-month. With a loan though, look into early repayment charges before considering upping your monthly instalment.
Not sure where to find the cash to top up your monthly payments? That leads very nicely onto our next strategy (anyone would think we’d planned it).
4. Money saving/budgeting plans
We realise it’s not as easy as just paying a little bit more each month. If it was, you wouldn’t be reading this right now.
But, if you’re living pay cheque-to-pay cheque there are ways you can cut back and save a few quid here and there, and (cliche alert) every penny counts.
As boring as it might sound, sit down with all your monthly outgoings information (bills, groceries etc.) and go through it with a fine toothcomb. Do you need Amazon Prime and Netflix? Could you save money by switching utility provider?
Crunch the numbers, identify areas where you can save, and put the extra money towards getting debt-free sooner.
See if you can save some money with our Best Time calendar. We’ve looked into the cheapest time of year to do all sorts - from switching energy suppliers to booking a holiday.
5. Stop creating more debt
Apologies if we’re teaching you how to suck eggs, but if your aim’s to be debt-free, the first thing to do is stop spending on credit cards/store cards/your overdraft. It won’t get you out of debt, but at least it won’t be getting worse.
Tip 1: It might be a good idea to set out a monthly plan to work out how much you’ve got to spend (after bills) to help prevent you running out before the end of the month.
Tip 2 Reduce the temptation to spend on credit by freezing your credit card (or cut them up altogether!).
6. Ask for a lower interest rate on your credit card
The higher the interest rate you’re paying, the longer it will take to clear your debt because a large amount of what you pay off each month goes to clearing the interest.
If you’ve got a good payment history (i.e. you’ve paid at least the minimum repayment on time each month) you might be able to negotiate a lower interest rate with your provider. And there’s certainly no harm in asking. Should your lender turn you down, the balance transfers we talked about earlier might be another way to secure a lower interest rate (note though that balance transfer cards often charge a 3-4% fee on the amount transferred). Often, some new credit cards come with a favourable fixed-term interest rate.
Tip: Try to pay off your balance before the fixed-term is up, after that you’ll likely be subject to a higher rate of interest.
7. The snowball method
It’s not as fun as it sounds, sorry. But it’s a method that’s been shown to be very effective.
Here’s how it works:
a) Pay off your smallest debt first (regardless of interest rates)b) Once you’ve cleared that debt, the money you had been spending on repayments each month becomes ‘surplus’. Use it to up your payments on your next smallest debt. c) Feel a huge sense of satisfaction with every debt cleared - leaving you motivated and more determined than ever to be debt free.
So they say anyway, but you get the picture - every time you pay off a debt, you leave yourself with more money each month to pay off the next one until voila, you’re debt free.
8. Use savings
If you’ve got them. Obviously this strategy isn’t particularly useful for those of us who aren’t savvy savers. But, if you’ve got money sitting in a savings account, using it to pay off your debt could be cost-effective long term. The money you save in interest fees is likely to be much more than the money you might be earning in interest on your savings, so don’t let that put you off.
And if you’re worried about spending your hard earned savings, use the money you would have been paying off your debts with to build them back up (once they’re cleared).
9. Remortgage (or take out a secured loan) and release equity
If you own your home, remortgaging or taking out a secured loan against your property and releasing some equity could be an option for clearing debts.
The interest rates charged on mortgages and secured loans are often substantially lower than other forms of lending, so you could find yourself paying less each month.
Be careful though, don’t go down this route unless you’re absolutely confident you can make the monthly repayments - as your home may be on the line otherwise.
10. Negotiate with your creditors
Last but not least, and maybe the most drastic strategy, is attempting to negotiate with creditors.
If there’s no way you can afford the monthly repayments, with some debts, you might be able to contact the creditor and negotiate a settlement, like a reduced monthly repayment amount.
This might sound great, but as the saying goes, if something sounds too good to be true it usually is.
While you might agree a settlement that seems great short-term, doing so could drastically impact your credit score and make it difficult and more expensive to borrow again in the future.
Disclaimer: All information and links are correct at the time of publishing.
By Bryony Pearce
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