Three-Step Plan for Paying Off Debt - NerdWallet UK (2024)

The cost of living crisis is continuing to put pressure on incomes across the UK and the burden of household debt is growing.

In research earlier this year by the Office for National Statistics, more than one in five adults in Great Britain said that they have borrowed more money or used more credit because of the increased cost of living – that’s equivalent to 11.5 million more people taking on greater levels of debt.

In fact, by the end of June 2023, adults in the UK owed an extra £42.1 billion compared to the June the previous year, bringing total household debt up to £1,842.6 billion – an increase of £791 per UK adult over the course of the year – according to research by The Money Charity, which focuses on financial wellbeing.

But even if you are struggling with debt, breaking down how you approach repaying it into manageable steps could help get your finances back on track.

1. Understand your spending habits

The first step on the road to getting out of debt is to get a clear picture of your finances. While the prospect of delving into your finances can feel uncomfortable, especially if you haven’t done it before, it’s important to be honest with yourself so you can find the best next steps.

Grace Brownfield, senior influencing manager at Money Advice Trust, the charity that runs National Debtline offering free advice by phone or online, says: “It can be tempting to ignore bills and letters that arrive from your creditors but resist the urge to bury your head in the sand. Take a deep breath and open all of your statements to work out how much you owe.”

Creating a budget allows you to keep an eye on all of the money you receive and what you spend it on. To get an accurate view of your financial circ*mstances, a budget should include details about your living costs, such as:

• Your income: Wages, bonuses or benefits you receive.
• Essential spending: Mortgage payments, rent, household bills and food.
• Non-essential spending: Holidays, socialising, leisure activities, subscriptions.
• Debt: Any repayments for credit including loans, credit cards and overdrafts.

Another benefit of a budget is it allows you to identify ways you could save money. Think about cancelling any unused subscriptions. Gym subscriptions and streaming services often go unnoticed and over time can add up to hundreds of pounds that you could be paying towards your debts.

2. Decide if your debt is manageable

Once you have a budget finalised, it’s time to decide whether or not your debt is manageable. Debt is typically considered manageable when you’re able to keep up with your repayments. If you would like to clear your debt faster, take a look at your budget to find areas that you can cut back on or find cheaper alternatives. Then if you can afford to, redirect these extra savings towards paying off your debt.

“It is also important to check your entitlement to benefits to maximise your income. Every little change in your circ*mstances can have an impact on what you might be able to claim and the amounts you get,” says Brownfield.

Debt can be considered unmanageable when it feels out of control – for example, if you miss repayments or think you will soon.

Joseph Beardsall, a spokesperson for Christians Against Poverty (CAP), a charity that offers free debt advice to anyone across the UK, says: “If you’re struggling to make your debt repayments and falling into further financial trouble as a result, it’s likely you are in unmanageable debt and may need to seek help and advice to find the best solution to your problem.”

• If your debt is manageable. You can use our step-by-step guide to get out of debt to help you prioritise, budget and manage your debt repayments.
• If your debt is unmanageable. Seek help – see more details in step three.

3. Get help with your debt

Remember that you are not alone when it comes to dealing with debt. If you need help making a plan to pay off what you owe, contacting a free debt charity or getting in touch with your creditor directly can help you get your finances back on track. In addition, government initiatives, such as the Debt Respite Scheme in England and Wales or a statutory moratorium in Scotland, could give you breathing space while you work out a plan to manage your debts. There aren’t any equivalent schemes in Northern Ireland.

“Picking up the phone and asking for debt help can be a difficult step to take, but there is no reason to feel ashamed or embarrassed as debt can happen to any of us for a variety of reasons. Making that call can be the first big step on your journey out of debt,” Beardsall explains.

Speaking with a professional, whether that’s over the phone, in-person or online, can help ease the pressure of finding a solution to your debt problems on your own. They’ll be able to assess your financial situation and work with you to tackle problem debt.

Financial worries can significantly increase stress and have a negative impact on your wellbeing. So it’s important to take care of your mental health while dealing with debt too.

You can get free assistance from a range of debt charities, such as StepChange, National Debtline and Citizens Advice. Plus mental health charities, such as Mind and Mental Health UK can offer free advice and resources to help you cope with what can be an extremely stressful situation.

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