How to get out debt in 2022: Eight steps to help

The pandemic has been challenging financially for some Britons – and with a cost of living crisis unfolding, it is likely that a growing number will be worried about escalating bills and debt heading in 2022.

A large number of people have turned to taking out loans or credit cards to cover their debts, something that can cause further problems and financial difficulty down the line.

To help those who have found themselves in debt, This is Money speaks to the experts for advice on how to get out of the red in 2022.

1. Prioritise what you owe

When in debt, it is important to work out what you owe and to who – as well as when you owe the money by.

Make a budget and plan where you could be overspending. Consider if that money could be used to pay off debt or could be saved.

The priority should always be to pay your most important bills first, for example, housing costs.

After, try to meet the minimum payment on every debt you have each month, to avoid default charges and the effect on your credit rating.

Then you should pay most towards the highest-cost borrowing – that’s the debt on which you’ll have to pay most interest and charges.

Rachel Springall of Moneyfacts said: ‘It may seem daunting for consumers to get out of debt but one of the first key steps is to budget, and that means dissecting household income and outgoings.

‘Breaking down expenses can make a world of difference to the mindset as it allow them too clearly cut back on, sometimes it’s a simple step but it really can help.

‘Someone could use a budgeting app like Money Dashboard or even start using a simple spreadsheet to tabs on household bills and upcoming expenses, like holidays and birthdays. 

‘If someone has a savings goal in mind, careful planning will help them not get cut short.’

Andrew Hagger of Moneycomms added: ‘Keep a simple spreadsheet on your phone and tablet and keep checking it against your bank account during the month to ensure you’re keeping on track.

‘2022 is going to be more important than ever to keep a close eye on your money matters as soaring inflation means your salary won’t go as far as it used to, so wasting money on bank and credit card interest should be kept to an absolute minimum by closely monitoring your bank balance and your spending.

‘If you haven’t already done so, sign up for a free online credit score report from the likes of TotallyMoney or ClearScore – you’ll get an updated copy and score straight to your email inbox every month, use this as your monthly reminder that you need to control your spending and borrowing to ensure you keep your score and report in good health.’ 

Customers can move outstanding credit balances to a zero transfer balance credit card 

2. Consolidate your debts

One way to ensure you’re on top of your finances is to consolidate your debts.

If planning to do this, ensure that once you repay any card balances that you destroy the cards and close the accounts completely. 

Rachel Springall adds: ‘Consolidating debts with loan will make it easier for consumers who may struggling with various debts. Typically credit cards are the first form of finance to be hit to cover household expenses because of convenience.

‘Overdrafts could also be used between pay days, or for those with growing debt that exceeds their net income.

‘Unsecured personal loans could be taken out to pay off more expensive forms of debt and create a fixed repayment plan, and none of these are secured to someone’s home or other forms of equity.

‘As unsecured personal loans are not tied to property, the element of risk for providers is much higher and more unpredictable than a mortgage or secured loan, for example, so rates can rise if providers feel its riskier to lend.’

Research from Moneyfacts in December 2022 shows that the average rate on an unsecured personal loan this month was 6.9 per cent when based on getting a loan of £5,000, which are not restricted to one term.

It is also important to be aware that only 51 per cent of successful applicants need to be offered the advertised APR of an unsecured personal loan.

This means the rate seen right now is not guaranteed to be the same as the rate offered after the application process, nor the rate available moving into 2022. 

3. Speak to debt experts

One of the best things those struggling with debt can do is speak to debt experts who can offer them professional advice on how to manage their money.

There are a number of charities and services that can help including Citizens Advice, StepChange and the National Debtline. 

These firms can give customers free advice and offer a range of options to help people become debt free. 

Andy Shaw, debt advice policy officer at StepChange: ‘If you’re looking to get back your finances back on track, budgeting is by far the best place to start. 

‘Having a greater awareness of what’s coming in and going out will enable you to evaluate the best next steps for you, whether that’s making savings or trying to increase your income.

‘But if you find that, even after a proper evaluation of your finances, the sums just aren’t adding up and you can’t see any way out of your debt, don’t worry. There are organisations out there who stand ready to give you the free, comprehensive debt advice you need to set you on the path to a brighter financial future.’ 

In particular, StepChange says if you have any of the following, you should consider seeking free financial advice:

· A negative budget – more going out than coming in

· Arrears on any ‘priority’ household bills, for example mortgage, rent, council tax or utilities

· Not enough disposable income to cover your minimum debt repayments – if your income has dropped due to coronavirus, you may be able to get a payment break from some of these bills, but it’s still a good idea to get free debt advice.

If you’re in this situation, don’t delay getting in contact with a debt advice organisation.  

4. Switch credit cards

Another way to get yourself out of debt is to move outstanding credit balances to a zero transfer balance credit card. 

This will mean you are getting a much lower interest rate and can avoid paying large interest fees that are often introduced after the initial zero per cent interest offer runs out. 

Springall said: ‘There are been a recent boom to 0 per cent balance transfer cards, and not only will consumers find lengthier terms, but the fees to transfer debts have also fallen.

‘For example with 0 per cent balance transfer cards, the top deal from Virgin Money for 35 months charges a transfer fee of 2.94 per cent which is a charge of £88.20 on a debt of £3,000, but there are fee-free options available elsewhere. 

‘Someone with a £3,000 debt that paid £150 back as a minimum per month would clear the debt in 20 months, but there are cards that can default to a repayment of just one per cent plus monthly interest – so their debt would hang overhead for much longer on this basis.’

Some of the top fee-free balance transfer credit cards on the market today are from NatWest for 20 months and Santander at 18 months.

Therefore, if consumers can pay off their debt within this period, £150 per month approximately for a £3,000 debt, they would save themselves £88.20 compared to the longest 0 per cent balance transfer offer on the market.

5. Avoid getting in your overdraft

Using your overdraft consistently can be an easy way to get into debt with some finding it difficult to ever fully get out of it. 

Getting out of it completely is a good step to ridding yourself of debt.  

During 2020 overdrafts were changed drastically due to an fixed fee ban by the FCA with some overdrafts charging up to 39.9 per cent equivalent annual rate (EAR).

This means it can be more expensive for those who remain in their overdraft for several days, so if someone finds this is happening more often than not, then they need to switch to a cheaper alternative.

At the moment, it would be cheaper for many consumers to borrow using a credit card than an overdraft.

Springall said: ‘Now there is more transparency for consumers to compare tariffs, it will be easier for them to compare charges to switch.

‘As we have seen during 2021, many banks and building societies adjusted their banking packages, so consumers may need to revisit their account and see whether it is working hard enough for them.

‘It’s simple to switch using the Current Account Switcher Service (CASS) and there is little reason to remain loyal to a brand if someone is getting little incentive or a poor level of service.’

Those in debt are encouraged to face their financial situation head on and create a budget

6. Cut down on spending

Whilst this might seem like simple advice, it could truly be the easiest way to get yourself out of debt.

Writing a budget is a good start to account for where your money goes each month and seeing if there is anything you could cut back on – or stop purchasing altogether.

Look for ways to cut down on outgoings which can be done by checking through your debit card payments to see if there is any you could cancel and looking through subscriptions to see if there are any that could be cancelled.

Small changes like stopping buying takeaway coffees and instead bringing your own flask can make a big difference in the long run. 

Hagger adds: ‘In the days off between Christmas and New Year set a couple of hours aside to thoroughly review your financial situation as it stands and put a plan in place to knock it into better shape in 2022.

‘Look at your bank statements and credit card statements and see where most of your money is going and what is swallowing up the bulk of your monthly salary.

‘Set yourself limits for non-essential spending and try to avoid relying on your bank overdraft for big chunks of the month as you’ll be surprised how much you’re shelling out in bank charges over the course of a year.

‘Many people know they are overspending, but it’s not until they sit down and analyse their statements that they realise just how much they are wasting on things they don’t need.

‘You almost need to go back to square one – write down a list of the things you have to pay – household bills, food, transport costs etc and then see how much spare money you have left for the month.

‘This amount should be used to make any financial payments you are committed to and a set amount for spending on going out, clothes and treats.

‘In an ideal world you should also set some money aside each payday into a separate savings account to cover any future financial emergencies or maybe as a fund for a forthcoming holiday.’

Customers are advised to avoid using Buy Now, Pay Later websites, such as Klarna & ClearPay

7. Avoid Buy Now, Pay Later

Each year, Buy Now, Pay Later plans become increasingly popular with a number of services available including Klarna, Clear Pay, After Pay and Later Pay.

The services allow customers to order items online and pay for them later or, alternatively, split the payments up into multiples, for example, paying the price off in three.

While these are growing in popularity, experts are increasingly warning the danger they pose to users – especially younger audiences.

The services have been criticised for encouraging people to spend more than they have then charge high interest rates if customers are unable to pay the money back in time.

Hagger added: ‘Buy now, pay later has now become the default way for many people to buy stuff – having to pay only a third of the price up front may seem great at the time, but using BNPL too frequently can soon get you in a financial muddle and even risk messing up your credit record.

‘It’s important not to live beyond your means and unfortunately BNPL is a tool that can help you do that very easily.

‘Too many people have multiple BNPL contracts running simultaneously and lose track of how much they’ve committed to and before they know it, they are well into their overdraft limit which is costing them nigh on 40 per cent in interest charges.’ 

A spokesperson from StepChange adds: ‘Unfortunately, the ongoing pandemic has added a lot of uncertainty into our lives, and this can make using credit more difficult. 

‘With the Omicron variant currently on the rise, and uncertainty over what the Government’s next steps might be, it’s a good idea to avoid any credit where you can’t predict with a good amount of certainty whether you’ll be able to pay it back at the end of the month, in case your income suddenly takes a hit.

‘Instead, we’d recommend considering if any purchases can wait until you’ve got the money in hand, instead of using services like Buy Now, Pay Later. If you must use credit, try to only use it where you’re certain that you can pay it off by the date it’s due.’

8. Switch to better deals 

Another tip to help customers to cut down on their debt is by saving money on their bills.

Using price comparison sites, consumers can see if they could save by switching to a cheaper energy supplier or moving to a better deal for their mobile, TV and broadband.

Whilst usually customers could save hundreds by switching to a cheaper energy tariff, deals are limited at the moment due to the ongoing energy crisis.

However, it is still worth doing research to see if you are better off with another supplier or on another tariff. 

Alternatively, it may be better to move to a standard deal at the moment as it is currently capped by the industry regulator, Ofgem, at £1,277 annually.

Although this is due to be reviewed, and likely increased, in April, it will most likely be the best deal you can get now.  

Ensuring you are getting the best deal on your insurance whether that be car or home policies is also beneficial.

Make sure to negotiate with your insurer if you want to stay with their service or switch to another policy that offers a better deal.