How to get out of debt in 2021

Fed up with being in the red? It doesn’t have to be this way. Find tips on getting – and staying – out of debt. 

Fed up with being in the red? It doesn’t have to be this way. Find tips on getting – and staying – out of debt. 

Anelda Knoesen
From the Money team
minute read
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Posted 14 APRIL 2021

Household finances affected by coronavirus and lockdowns

The pandemic has taken a toll in lots of ways, not least financially. Some people have been hit with furlough and job losses, while others have managed to save because of working from home and fewer opportunities to spend.  
However you’ve been affected, if you're in debt then it’s probably made you aware that reducing your debts could put you in a more financially secure situation. So how should you go about doing it? Here are a few steps to try. 

1. Make a list of what you owe

You need to understand your finances before you can create a plan to pay down debt. List everything you owe and upcoming expenses, including:

  • Mortgage or rent
  • Loans
  • Credit cards
  • Overdrafts
  • Bills – utility bills, Council Tax
  • Insurances – home, car, life, health etc
  • Regular outgoings like your food shopping, vehicle tax, fuel, fares, school lunch money, Netflix or other subscriptions

Don’t overlook things like birthday presents and clothing (even if it feels like you’ve worn nothing but leisurewear for a year). Ideally you want to list absolutely everything you spend your money on. Using bank and credit card statements is a good place to start.

Once you know what you spend your money on, you can see how this compares with your income.

If you’ve got more going out than coming in, you need to act fast to make sure the problem doesn’t get worse. If you’ve got a surplus of income, you’ll have an idea of how much you can potentially use to pay down debt. Either way you’ll need to know which debts to prioritise.

2. Prioritise what you owe

Priority debts are the ones that will have really serious consequences if you don’t pay them. For example:

  • Rent, mortgage or any loans secured against your home
  • Gas or electricity bills
  • Council tax
  • TV licence
  • Child maintenance
  • Payments to HMRC like Income Tax, National Insurance and VAT

These are the bills you should pay first. Then try to make at least the minimum payments for your other bills.

3. Get help if you need it 

With debt, typically the sooner you get help, the easier it is to resolve things. So if you can see that you have a shortfall, take action. By contacting your creditors, you may be able to negotiate payment holidays or agreements to pay off arrears, by paying a little toward them every month.

If someone is just about keeping their head above water with their debts, it could be a good idea to focus on paying off high-interest debts first, no matter how small.

You can get free, non-judgemental debt advice. Check out the Money Advice Service’s free debt advice locator tool.

4. Consolidate your debts

It can be tricky to juggle your repayments if you’ve got say, a couple of credit cards, a car loan and an overdraft.

What might help here, is to combine all your debts into one loan. This way you only have to make one monthly payment, which could make repayments more affordable. But be aware that you might pay more overall if you end up paying the loan off over a longer period. You also need to check to see if you’d face any penalty for paying loans off early. Some people might be better off with a debt consolidation loan.

If you do decide that a debt consolidation loan is the right option for you, it’s essential that you don’t start maxing out your credit cards again. That’s because you’ll be back where you started, but with an even larger loan to service. 

5. Lower your interest rates

You may be able to save money by finding loan, mortgage or credit card deals with a lower interest rate than you’re currently paying. This could be especially relevant if you took out credit when interest rates were higher.

Switch credit cards – if, for example, you owe £3,500 on a credit card with 25% interest, you’ll be paying £100 a month just making the minimum payment. If you could find a card with 15% interest, you’d ‘only’ have to pay £79 a month. At least this would allow you to spend £20 a month paying down your debt.

Switching to a 0% balance transfer card could potentially save you even more. You wouldn’t pay any interest during the 0% period, so all your payments would go to paying off your debt.

See if you could save money: Find a credit card with lower or 0% interest.

Get a loan with lower interest rates – interest rates are at a historic low, so if you took out a loan a few years ago, you may be able to find an alternative with a better rate of interest. But you’ll have to do your sums carefully, taking any early repayment charges into account, to make sure you’ll be saving money overall.  
Lenders are also likely to be taking an extra-close look at affordability at the moment, with worries over how the economy will recover. You can see what loans you’re likely to be eligible for, with Compare the Market’s free eligibility checker.

Stop living off your overdraft – a change in overdraft rules in April 2020 means that banks can no longer charge additional and excessive fees for unauthorised overdrafts. The result is that most overdrafts are now charged at an annual interest rate of around 40%. If you’re continually overdrawn, this can be very expensive.  
Set up bank alerts - to warn you when you’re about to go overdrawn. If you can’t afford to pay off your overdraft in one go, see if you can avoid going overdrawn by an extra day or two every month, for a few months. If you’re paying a lot in interest, work out if a loan to get you back in the black could be cheaper. You can try our free loans eligibility checker.  
Find a cheaper mortgage – switching to a new mortgage when you come to the end of a fixed term deal would probably be cheaper than moving to your lender’s standard rate. See more on remortgaging.

6. Make more than the minimum payments if you can 

If you’re not struggling to make ends meet, one of the fastest ways to cut down on debt is to make more than the minimum payments. If you overpay on a loan or a mortgage, you might be able to pay off your loans early, but check that any early repayment charges won’t cancel out any savings.

But only making the minimum repayments on credit cards could mean your debt takes years to pay off. This is because, as your balance reduces, the minimum amount you pay every month reduces in parallel. If you can carry on paying what you paid in your first month, it can save you a significant amount of money over time. Typically, it’s better if you can afford to pay a higher fixed payment every month.

Amount owed on credit card  Interest rate  Monthly payment  Time to pay off  Total interest paid  Total paid 
£2,500  18%  Minimum payment (First monthly payment £59)  25 years 10 months  £3,286  £5,786 
£2,500  18%  £59 every month  5 years 5 months  £1,297  £3,797 
£2,500  18%  £100 a month  2 years 7 months  £592  £3,092

7. Cut down on spending

Reducing your spending will mean you should have more money available to pay off your debts. A good place to start is with your regular bills. See if you can compare and save money on your: Gas, electricity, broadband, and mobile phone.
Not sure if you’re paying too much? See what your neighbours in similar properties in your area are paying, using our bills calculator.
When your car insurance or home insurance is coming up for renewal, make sure you compare to see whether you can save by switching. For example, 50% of consumers could save up to £228 on their car insurance premium.** 
**Based on Online independent research by Consumer Intelligence during November 2020, 50% of customers could save up to £228.64 on their car insurance premium. 

8. Create a budget and a plan

Now you’ve taken a long hard look at your finances, got your priority debts under control and cut back where you can, it’s time to set a budget and see what you can do to reduce your debts even further.

There are a couple of approaches to this:

  • Pay off the debts that are costing you the most in interest
  • Pay off the debts in order of size – the smallest first

It’s also a good idea to check and improve your credit score throughout this process. The better your score, the lower the interest rates you could be offered on credit cards, mortgages and loans – although avoid falling back into deeper debt.

Once your debts are paid off, it’s time to start saving. Start with building up an emergency fund – the Money Advice Service recommends at least three months’ worth of essential outgoings in an instant access savings account.

It may take a while, but reducing your debts will allow you to take back control of your finances.

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