We’re often hardwired to feel guilty about debt and avoid talking about it. But debt is a reality to many of us – at some point in our lives, we’ll need to borrow money to pay for a car, university education, or a home.
Debt is sensible as long as it’s manageable and helpful for your long-term goals and needs. It could help improve your credit score and sometimes even save you money. However, when debt becomes expensive and unruly, it could seriously harm your financial wellbeing.
So, if you’re looking for effective ways to manage what you owe so it doesn’t get out of control, this is the guide for you.
1. Know how much you owe
First step: write down all your existing debts. Make sure to include their current balances, monthly payments, interest rates, and due dates. This will help you find out where you stand and spot your most expensive debts.
2. Work out a budget
Budgeting gives you a clear picture of where your money will go each month and how much you’ll have left after you’ve paid for your necessities, including food, utility bills, and rent. Set aside any leftover money to pay down your debt.
A budget also helps you identify any expenses or spending habits you can cut, allowing you to put that extra money towards paying off your debt.
3. Pay off your most expensive debt first
Use the list in step one to rank your debts in order of interest rate. Focus on paying off the debt with the highest interest rate first because it's costing you the most money.
However, before clearing your more expensive debt, make sure to take care of minimum payments on other debts. Missing payments will lead to late fees and can damage your credit file. To avoid these potential consequences, you can set up regular automatic payments.
4. Consider consolidating your debts
If managing multiple debts in different places is causing you too much stress and hassle, perhaps it’s time to consider moving everything you owe into one single loan.
With a debt consolidation loan, you only need to make one payment each month, which helps you easily stay on top of your finances. You could even save money if you’re offered a lower interest rate and potentially clear your debt faster.
Keep in mind that a debt consolidation loan isn’t the best solution for everyone. It could lead to even more debt if you fail to repay on time. So before you decide to consolidate your debt, know where you stand and don’t borrow more than you can afford.
If you’re unsure if debt consolidation is right for you, talk to an expert. You can always contact organisations like PayPlan and StepChange – they offer impartial, confidential, and free debt advice.
5. See if you can afford to make extra payments
It isn’t always possible, but try making extra payments each month if you can afford to. This could help you clear your debt faster, and ultimately save money on interest.
However, you should always check your contract before making overpayments, as some lenders may charge you for paying off your debt early.
6. Remember, you can always ask for help
If you’re struggling or think you won’t be able to meet future payments, know that you can reach out for help. Organisations like PayPlan, StepChange, and National Debtline have helped millions of people with financial difficulties in the UK. They’re ready to offer free advice and resources to help you get back on track.