5 Steps to Becoming Debt Free
1. Getting Started
Regardless of what else
you choose to do, the most helpful course of action is to tell
somebody that you are in debt, whether it's a friend or family
member, or a debt advisor (see our debt charities page). They may be able
to support you emotionally and even financially, and it is
absolutely the key first step in facing the problem of debt, and
solving it.
2. See Where Your Money Goes
Writing a budget will enable you to see where your money is coming and going, and help you to gain some control.
Income: make a note of all the money you receive in a month (salary, tax credits, benefits, interest from investments).
Expenditure: make a
note of all the money you realistically spend per month. If you're
not sure, start to keep track by taking a notepad and pen around
with you. Factor in occasional payments such as presents, holidays,
car tax and MOT.
When you've worked out your income and expenditure, subtract your total expenditure from your total income, and what remains is your disposal income - money that is available to offer your creditors to pay off your debts.
If you don't have any disposable income, in what ways can you begin to make cuts? And are there ways in which you can increase your income? (eg. renting out a room in your house, working overtime).
3. Spend Less
It may be that your
lifestyle costs more than it needs to. Consider changing some of
the services listed below, and you could significantly reduce your
expenditure.
Phone and internet contracts: find a more suitable tariff. The chances are you will be able to switch over very simply, and free of charge, simply by making a phonecall or switching online.
Credit cards: avoid opting to make minimum repayment amounts, as this plays into the card issuer's hands and leaves you paying far too much interest.
Mortgages: remortgaging to get a better deal for your circumstances can save you an average of £962 a year.
Insurance companies: reviewing your insurance providers at every renewal period to be sure you are getting the best deals can save you huge amounts of money. Look out for instances where you may have unnecessary double cover, for example, if your home insurance covers your mobile phone, you certainly don't need to pay £5 a month for mobile phone insurance.
Gas and Electricity Suppliers: Your method of payment may be unsuitable for you: direct debit tends to be the cheapest way, although in certain circumstances you might do well to try a pay-as-you-go meter for easier budgeting. It's also worth doing some research to see if you are using the cheapest energy supplier in your area, for example by using the Energylinx switching tool.
4. Assess Your Debts
Make a list of all the
people you owe money to, and roughly how much you owe. Include
student loans, credit card debts, secured and unsecured loans,
overdrafts, store card debts, money owed to friends and family,
fines, HP agreements and arrears on any priority payments such as
mortgage, council tax and utilities.
Work out which debts are priority debts and which are secondary debts. Priority debts are amounts of money owed to creditors for which there are consequences for you, sometimes serious, if not paid. These include mortgage repayments, secured loans, rent, Council Tax, utility bills, taxes, and court fines. Secondary debts are amounts of money for which the creditor is unable to do much if an amount remains unpaid to them. These include credit card debts, store card debts, unsecured loans and loans from friends and family.
Because secondary creditors have so few effective rights against you, they will hassle you the most to pay the money back by phoning you and writing to you at every opportunity. However, bearing in mind the potential consequences of leaving priority debts unpaid should help you avoid getting sucked into secondary debt repayments.
5. Bring In The Specialists
Ways you can deal with
debt include arrangements you can make with your creditors, or more
formal ones that debt specialists can organise for you. It is
important to get independent advice to help you find the best way
to deal with your debts. You may be presented with the option to
pay extra costs and agree to certain conditions, but there are
plenty of succesful and helpful charities who will help you get out
of debt without asking for any money at all, and it is always worth
choosing one of these!
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