From mortgages and car loans to credit cards and overdrafts, debt comes in various forms and is a fact of life for many people. But if you’re feeling overwhelmed about the amount of money you owe or you’re concerned that you can’t make the repayments, being in debt can be extremely stressful. It can put a strain on your relationships, affect your mental well-being and have a negative impact on your everyday life.
If you’re in debt, you may feel like you’re in an impossible situation that’s just getting worse. But the good news is that getting out of debt can be done. It just takes a little time and effort.
We understand that everyone’s situation is different, but there are various things you can do to improve your financial situation. And once you’re out of debt, you can stay debt-free by adopting good spending habits. Keep reading to find out more.
How do you get out of debt and stay out of it?
Depending on the type of debt you owe, you may be able to pay it off faster by speaking to your creditors to see how they can help, consolidating your debts, and adjusting your budget to make more than the minimum monthly repayments.
You can also pay one debt off at a time to help you stay motivated, seek help and advice from a debt charity or — as a last resort — file for bankruptcy to have your debts written off.
In this article, we’ll advise on how to get out and stay out of debt. But before you start trying to rectify your debt problem, it can be helpful to understand why you might be in debt in the first place.
Why do people get into debt?
There are many reasons why people get into debt. And it’s not always down to bad money management. Sometimes, getting into debt is a result of major life events, such as having a baby or moving house. Some of the most common reasons people get into debt are:
- A failed business
- A lack of savings
- Being on a low wage
- Education costs
- Having children
- Poor money management
- Splitting up with a partner
- The rising cost of living
- Unexpected expenses
How much debt is too much?
Whether it’s getting a mortgage on a house or taking out a student loan to pay for higher education, most people will be in debt at some point in their lives. Often, it’s not debt itself that’s the issue. The problem usually lies in the way the debt is handled and how much of it there is. But you may be wondering how much debt is too much.
To give you an idea, it’s recommended that your annual debt payments (on things like auto loans, credit cards and personal loans) should be no more than 20 per cent of your annual take-home salary. For things like rent or mortgage payments, your debt can be 30 per cent of your annual take-home salary.
If your debt exceeds this, you may be a compulsive debtor. Some other signs of being a compulsive debtor are:
- Being unaware of your financial situation
- Compulsive spending
- Depriving yourself of basic needs in order to pay creditors
- Difficulty meeting basic financial obligations
- Falsely believing that someone will eventually rescue you, so you’re not in real financial trouble
- Having multiple financial crises
- Living “paycheque to paycheque”
- Overworking in order to pay creditors
- Poor saving habits
Six tips for a debt-free life
If you’re in debt and you’re finding it hard to see a way out, you may be able to rectify your situation by doing one or more of the following:
1. Don’t ignore your creditors
It can be tempting to ignore all those red letters from your credit card company in the hope that the problem will go away on its own. But burying your head in the sand won’t help your situation. In fact, it will make it worse because late payment fees and charges could put you in even more debt.
As soon as you realise your debt is getting out of control and you’re struggling to make your repayments, you should contact your creditor and explain your situation. They may be able to come up with a more affordable repayment plan for you or change your payment date to one that’s closer to when your wages get paid.
If you can afford the repayments but remembering to make them is the issue, set up automatic payments or reminders to ensure you never miss one.
It also makes sense to deal with any debts in collections first to reduce their impact on your credit score and eliminate the added stress caused by threatening letters from debt collection agencies.
2. Consolidate your debts
If you have many different types of debt, it can feel overwhelming having to remember to make multiple repayments every month. So, consolidating your debts can ease the pressure.
Also, if you have all your debts in one place, you may find you pay less in interest, which will enable you to pay off your debt faster. For example, you could take out one debt consolidation loan with a lower interest rate than your existing debts and use it to pay off your credit card balances. Another option is to consolidate credit card debt by applying for a balance transfer credit card with a zero per cent APR for a period of six to 18 months. If you won’t be able to pay the balance in full before the promotional period finishes, just make sure you can afford to pay the new interest rate. And bear in mind that you may have to pay a balance transfer fee of around three per cent.
3. Reassess your budget
You can pay your debts off faster by either earning more or spending less. You may be able to take on a second job or side hustle or even get a new job that pays more money. If not, you will have to adjust your lifestyle to reduce your outgoings.
The best way to do this is to reassess your budget by calculating your monthly debt payments and all your expenses (such as your rent, utility bills, groceries, clothing, transport costs and entertainment) and comparing this figure with your earnings. If you’re spending more than you’re earning, you will need to make some cutbacks, such as eating out less or shopping at a cheaper supermarket. If, on the other hand, you’re earning more than your outgoings, it makes sense to increase your debt repayments to pay your balances off faster.
If you have savings, it’s usually best to use this money to repay your debts. This is because the interest you’re charged on debt is usually much more than the interest you receive with a savings account.
4. Prioritise which debts to pay off first
If you’re unable to consolidate your debts and, after reassessing your budget, you find you can afford to pay more than the minimum amount, you might find it helpful to try the “debt snowball method”.
To do this, you make just the minimum payment on all your debts apart from the one with the lowest balance. With this debt, you pay more than the minimum balance by using any leftover money. Once you’ve paid that debt off completely, you put more money into paying off the next smallest debt. The quickest way to pay your debts off in this way, though, is to pay off the one with the highest interest first. This is especially important to do if you have debts with extortionate interest rates, such as payday loans, which usually have an APR of 300 to 400 per cent.
This method of debt repayment works because it motivates you by eliminating your debts one by one and reducing the stress that’s caused by owing multiple debtors.
5. Speak to a debt charity
If you’re really struggling with debt and you’re finding it difficult to see a way out, organisations like Citizens Advice and National Debtline can offer advice and support. They can help you create a realistic budget, give tips on how to make the most of your money and provide solutions such as debt management plans. If you can’t afford to make your minimum monthly payments, a debt management plan may be the best option for you. You can either speak to your debtors directly or go through a debt management company, which will negotiate with your creditors on your behalf. It’s worth noting, though, that enrolling in a debt management plan could affect your credit score.
If you feel you are a compulsive debtor, you may wish to consider joining Debtors Anonymous. This is a 12-step programme for people whose lives have become unmanageable because of debt.
6. File for bankruptcy
If you have made every attempt to solve your debt problems, but you still can’t see the light at the end of the tunnel, your only option may be to file for bankruptcy to pay off only part of your debt or have it written off altogether.
If you decide to go down this route, you should be aware that not all debt can be cleared through bankruptcy. Student loan debt and money you owe on court fines or taxes, for example, will still need to be paid off.
Declaring bankruptcy should be a last resort as it remains on your credit report for up to ten years, meaning you may struggle to be approved for a mortgage or credit card in the future.
Stay out of debt by creating good spending habits
After all the effort it took for you to get out of debt, it would be a shame to find yourself back in the same position later down the line. So, create good spending habits — and make sure they’re ones you can stick to.
Some spending habits to think about adopting include:
- Be patient — Be in the mindset that if you want something, you should save up for it rather than putting it on a credit card. In any case, you should find this a more rewarding way of making purchases, as psychologically, as you’ll feel like you’ve earned something rather than getting instant gratification. If there’s a big purchase you want, wait a week before buying it to see whether it’s something you really want.
- Have restraint — Avoid taking on new debt. If you’ve taken out a balance transfer credit card to pay off your old one, cut the old card up, so you’re not tempted to spend money on it again.
- Adjust your lifestyle — Live within your means by cooking at home more instead of eating out, for example, or trading in your fuel-guzzling car for one that’s more economical.
- Stick to your budget — Revisit your budget frequently to make sure you’re sticking to it and make any necessary adjustments to help you stay on track. For example, you could write a list before doing your grocery shopping to encourage you only to buy what’s on that list.
Once you’ve freed yourself of debt, it should be relatively easy to take on these new habits, as you won’t be paying money in interest, meaning you’ll be able to spend more money on the things you enjoy.
Being in debt isn’t always down to bad money management. Sometimes, getting into debt is a result of major life events, such as having a baby or moving house.
If you’re in debt, you may feel like you’re in an impossible situation that’s just getting worse. But getting out of debt is possible if you’re prepared to make some adjustments. Six ways you may be able to pay your debt off faster are speaking to your creditors to see how they can help, consolidating your debts, adjusting your budget to make more than the minimum monthly repayments, adopting the “debt snowball method”, seeking help from a debt charity or — as a last resort — filing for bankruptcy.
Once you’ve cleared your debt, you can ensure you stay debt-free by saving for big purchases rather than putting them on a credit card, not taking on new debt, adjusting your lifestyle, so you spend less and taking measures to ensure you are sticking to your budget.