How to get out of debt - and stay out
Debt is a very common but often private problem
Being in a bad place with debt feels horrible - it comes with a lot of shame. Damo remembers walking around with his young son, pushing him in his pram in the rain because he couldn’t afford to do anything nice with him. He felt like a complete failure.
It’s an awful but common place to be. A survey for Debt Justice found that 13% of adults have missed three or more credit or bill payments in the last six months - a figure that rises to a quarter of 25-to-34-year-olds, and nearly a third of 18-to-24-year-olds.
If you’re having issues with debt, please reach out to StepChange for free. Too many people wait far too long, which makes everything so much worse. You don’t need to pay for advice for clearing debts.
Understand the impact
If you do anything to break your contract with a lender (not paying on time) it will result in negative effects on your credit rating.
For example, default notices - which are typically issued after three months of not paying - will be on your credit file for six years. The same goes for mechanisms to reduce or wipe off your debt like Debt Relief Orders, IVAs or bankruptcy - they will have a long lasting impact on your credit rating.
Before you decide on these types of solutions make sure you understand the impact - StepChange can help.
Tackle priority debts first
There’s no magic hack for getting out of debt. It's best to hammer them one at a time, in the following order:
Priority debts: This means anything owed to the government that can land you in prison (like council tax) as well as being behind on payments that affect your housing like rent or mortgage payments.
Secondary debts: These are key services you’ll lose if you do not pay for them like utility bills or car finance.
Unsecured debts: Like credit card bills.
Key steps
Speak to StepChange. If you only do one thing after this email, do this.
Reach out to the organisations you owe money to. It’s important to understand they are not the enemy. They have to spend incredible amounts of money each year chasing people who disappear. This means they much prefer it - and are more likely to help - if you call them and just explain you’re struggling. This is so they can help, perhaps by setting up a payment plan.
You should deal with priority debts first, like rent. To do this effectively you need to budget, which was the subject of our previous email (you can use this spreadsheet here).
Then move onto paying off secondary debts, like utility bills.
After that, you should pay the minimum required on each unsecured debt. The most logical approach is to pay off the highest interest rate first, because it’s the most expensive. Once you’ve knocked that one down, you should move onto the next highest interest rate debt and so on until you're debt free.
Other tools - and a warning
You may want to consider things like consolidation loans or the use of interest-free credit cards. They can be great tools to reduce the burden of payments or to save money on interest rates (make sure the interest rate is lower) but you have to be really careful if you’ve had issues controlling spending on debt. Consolidation comes with the temptation to just use the cards again, so once you’ve consolidated, cut up all your other cards to remove the temptation to use them again.
You can learn more about getting out of bad debt from this episode.
This is not financial advice. The reason it’s not financial advice is because it’s not tailored to you. We are here to talk about the principles of building wealth but if you want personalised help, it’s worth speaking to a financial advisor (although in the case of debt please look to StepChange, for free). As with everything financial, please do your own research. We really encourage that because no one cares more about your money than you and if you learn the basics then it’s life-changing.
