Tomorrow marks the start of a new decade and for many, getting out of debt might be the number one goal – but they might not know where to start.
Our recent analysis revealed that the personal debt mountain continued to grow in the 2010s and Britons are £45billion more in the red than they were a decade ago when it comes to credit cards, personal loans and credit cards.
The festive period can also be expensive and could see households falling behind on financial commitments after splashing out.
Half of those already in debt will be in a worse financial position after Christmas with 20 per cent worried they will be unable to recover, according to research from YouGov.
New year: This is Money has revealed how Britons can get themselves out of debt in 2020
The average person spends around £1,100 a year on Christmas with almost £400 of that going on gifts.
But help is at hand if you’re in a debt hole you’re struggling to burrow out of. This is Money and financial experts reveal five steps to getting out of debt.
1. Figure out what you owe and prioritise
Those in debt will have varying levels of it, therefore, the first step is to figure out how much you owe and then work out what you can do about reducing it.
Graham O’Malley, debt expert at Citizens Advice, said there are six simple steps you can take to start sorting out your debts:
– Work out how much you owe: Make a list of who you owe money to and add up how much you need to pay each month. If you don’t have your most recent statements, contact your creditor to find out what you owe.
– Prioritise your debts: Your rent or mortgage, energy and council tax are called priority debts as there can be serious consequences if you don’t pay them. These should always be paid first. Separate these and work out how much you owe.
– Work out how much you can pay: Create a budget by adding up your essential living costs, such as food and housing, and taking away these from your income. Any money you have spare can be put towards your debts. Citizens Advice budgeting tool can help.
– Paying urgent debts: You might have to contact priority creditors quickly in urgent situations, such as if you are about to be evicted. Tell them you’re seeking debt advice so you can find a way forward. You could try to pay them something if you can afford to.
– Paying non-urgent debts: If you have any money left after paying priority debts, consider getting a free debt-management plan. You’ll make one monthly payment to the plan provider, who will handle paying your creditors. Or contact your creditors and offer them what you can afford to pay.
– If you can’t pay your debts: If you’ve got little or no money spare to pay your priority debts seek advice from us straight away.
Households have found themselves over £45bn more in debt than they were just a decade ago
2. Consolidate your debts
One of the most efficient ways to instantly clear debt is to take out a personal loan or another credit card so all your debt is in one place and can be easily paid off in monthly installments.
However, in order to do this you must have a good enough credit rating for the loan company to give you a low interest rate, which can also determine how much they will lend you.
Therefore, this may not be an option available to anyone – and those who do consider it must make sure they’re not going to get into further debt with increasing numbers of loans and cards to pay off.
It is important to check the length of the loan you are taking out and the rate associated to make sure it is one you are able to stick to.
Andrew Hagger of Moneycomms said: ‘If you find it virtually impossible to keep track of your credit card balances, the size of your overdraft or repayments on your store cards or car finance, maybe it’s time to consider amalgamating all your borrowing with a single personal loan.
‘If you’re going to go down this route, make sure that once you repay any card balances that you destroy the cards and close the accounts completely.
‘The last thing you want is to have restructured your debt and then get back into bad habits by running up new debts on your plastic.’
Research from Moneyfacts shows that in November 2019, the average rate on an unsecured personal loan was 7.2 per cent when based on getting a loan of £5,000, repayable over three years.
|Average loan rates (by tier)||Dec-17||Dec-18||Nov-19|
|£5,000 over three years||7.20%||6.80%||7.20%|
|£7,500 over five years||4.70%||4.80%||4.70%|
|£10,000 over five years||4.60%||4.70%||4.70%|
|Source: Moneyfacts Treasury Reports|
Rachel Springall of Moneyfacts said: ‘The unsecured personal loans market is still buoyant, with rates falling over the past quarter.
‘This improvement to the loans market could be encouraging for borrowers considering consolidating their debts either now or in the new year.
‘In terms of how long this competition will last it is difficult to predict, as lenders may feel some pressure to change their loan pricing in 2020.
‘The risk of consumers defaulting on loans may be a concern during a period of economic uncertainty, so loan rates could rise or lenders could even pull out of this market entirely.
‘While the lowest loan rate is less than three per cent, it is important borrowers are aware that as only 51 per cent of successful applicants need to be offered the advertised APR of an unsecured personal loan, these are not guaranteed.
‘To assist borrowers, it would be wise for them to check their credit report before applying and check it for any errors.
‘Borrowers looking to take advantage of the lowest rates may only be able to apply online or by phone.
‘It is unlikely that they will find rates any lower with their existing high street bank, so it’s important to consider alternative brands for an unsecured personal loan.’
How to pay off your debts quicker
StepChange Debt Charity have provided their tips on how to pay off debts quicker:
– Do a budget: Write down all of your income – including wages, benefits and pensions – and everything you’ll have to pay out during January, from your regular household bills to your weekly food shop.
Think about any one-off expenses you’re likely to have during the month as well – have you got a dentist appointment? Is the car due for a service?
Once your budget is complete, subtract your estimated outgoings from your income. This is your ‘disposable income,’ and it’s what you’ll have available to clear your debt.
– Can you bring in any extra cash? If your normal disposable income won’t cover your debts, you might want to look at ways you can increase your income in the short term.
There are plenty of ways to make a few extra pounds, such as by selling unwanted Christmas presents, using cashback websites or taking on extra hours at work.
– Can you make any savings? There are also many ways to save money, and anything you save can be put towards those debt repayments.
It could be as simple as switching to a cheaper supermarket, or taking shorter journeys on foot rather than by car or bus.
– Prioritise: If you still need to pay some debts off, you’ll need to prioritise. You’ll need to make sure you cover the minimum payment on every debt you have, to avoid default charges and affecting your credit rating.
After that, you should pay most towards the highest-cost borrowing – that’s the debt on which you’ll have to pay most interest and charges.
If you still need debt advice, StepChange provide free and discreet debt advice, online, 24/7 at stepchange.org, or over the phone on 0800 138 1111.
3. Switch credit cards
Another option is to move outstanding credit balances to a zero transfer balance credit card.
New debt trap?
This year, a new debt trap has emerged, especially enticing millennials and the younger generations.
Buy now, pay later firms have taken retailers by storm.
It works by allowing customers to pay for items online at a later date – usually 14 or 30 days after the order is made.
Some firms also allow customers to spread the cost of their purchase over multiple payments.
For example, Klarna, one of the most well known of the buy now, pay later firms lets customers pay for their shopping in three equal payments on their Slice It option.
However, the companies have been criticised for encouraging younger shoppers to spend more money than they have, leaving them facing high interest rates if they cannot pay in time.
By doing so you can help yourself secure a much lower interest rate and can take advantage of not paying hefty interest fees that are often introduced after the initial zero per cent interest offer runs out.
To make the most of your balance transfer credit card, you should ensure that you are disciplined about paying off as much as you can afford each month which should ideally be more than the minimum payment.
Ensure you pay off your debts before the zero per cent interest term ends by paying off as much as you can regularly.
Hagger added: ‘If you’re like a lot of people after Christmas dreading the monthly statements for your store cards and credit cards, January is the ideal time to save some serious money and focus on reducing your debts.
‘For example if you’ve got £2000 spread across your cards at an average interest rate of 19 per cent APR, and paying back five per cent of the balance each month, it’ll take you almost nine years to clear the balance and cost you more than £835 in interest charges.
‘Simply by switching it to a 0 per cent balance transfer card and paying off £100 per month, you’d be debt free in just over a year and a half and if you opt for the 18 month 0 per cent deal from Barclaycard there’s not even a balance transfer fee to pay.’
Below, This is Money has attached a list of the best credit cards for zero per cent balance transfers.
|Card Provider||Card Name||Intro Rate||Intro Term||Intro Bal Trf Fee||Purchase APR|
|MBNA Limited||MBNA Limited Long 0% Balance Transfer Mastercard||0.0%||for 29 months from date of card issue.||2.75%||20.9%|
|Halifax||Halifax 29 Month Balance Transfer Credit Card Mastercard||0.0%||for 29 months from date of card issue.||3.00%||19.9%|
|Sainsbury’s Bank||Sainsbury’s Bank Balance Transfer Credit Card Mastercard||0.0%||for 29 months from date of card issue.||3.00%, Min: £3.00||19.9%|
|Virgin Money||Virgin Money 29 Month Balance Transfer Credit Card Mastercard||0.0%||for 29 months from date of card issue.||3.00%||21.9%|
|M&S Bank||M&S Bank Transfer Plus Mastercard||0.0%||for 28 months from date of transfer.||2.85%, Min: £5.00||19.9%|
|Tesco Bank||Tesco Bank Clubcard Credit Card for 28 Months Balance Transfer Mastercard||0.0%||for 28 months from date of card issue.||2.98%||19.9%|
|Lloyds Bank||Lloyds Bank Online Platinum 28 Month Balance Transfer Mastercard||0.0%||for 28 months from date of card issue.||3.00%||19.9%|
|Barclaycard||Barclaycard Platinum 28 Month Balance Transfer Visa||0.0%||for 28 months from date of card issue.||1.75%||21.9%|
|Virgin Money||Virgin Money 27 Month Balance Transfer Credit Card Mastercard||0.0%||for 27 months from date of card issue.||1.45%||21.9%|
|MBNA Limited||MBNA Limited Low Fee 0% Balance Transfer Mastercard||0.0%||for 26 months from date of card issue.||1.00%||20.9%|
|Sainsbury’s Bank||Sainsbury’s Bank Low Balance Transfer Fee Credit Card Mastercard||0.0%||for 26 months from date of card issue.||1.00%, Min: £3.00||20.9%|
|MBNA Limited||MBNA Limited 0% Transfer and Purchase Credit Card Mastercard||0.0%||for 26 months from date of card issue.||2.89%||20.9%|
|Source: Moneyfacts.co.uk, correct as of 16 December|
4. Save money and pay off debt
Putting aside as much money as you can each month to pay off any existing debt is the best way to get out of it.
Rather than extending your overdraft limit to allow you to spend even more money, try and budget your funds instead.
However, if your only option is using an overdraft or face paying late charges which could affect your credit score, it may be worth dipping into it.
Springall said: ‘Overdrafts should only ever be used as a last resort for a few days until customers get back into the black.
‘However, for some, an overdraft can be a lifetime to pay the end of the month bills if they have fallen into the red that month, whereas without an overdraft facility, their payment would bounce and could impact their credit score as a late payment.
‘Borrowers must make use of text alerts from their bank if they are about to become overdrawn and try to credit their account if they can.’
5. Switch to better deals
Switching utilities suppliers is one of the easiest ways to save money on your household bills.
The practice has become even more popular this year with Energy UK revealing more households have switched electricity and gas supplier than ever before.
By moving energy firm, customers could save on average £447 a year, according to uSwitch.
Using price comparison sites is one of the best ways to switch and can show you exactly what other offers are available.
Households can switch mobile, broadband and TV packaged to other suppliers to save money.
It is worth looking at how much you pay each month and then see whether you could be paying less either on another deal or with another provider.
The loyalty penalty often applies to customers who stick with the same provider for years on end with the best deals saved for existing customers, meaning the savvier you are with switching, the better deals you will get.
How much could you save on bills?
This is Money’s carefully chosen energy switching partner EnergyHelpline gives an unbiased look at all the energy deals in your postcode, so you can work out which is best for you.
Use our energy switching calculator to see how much you could save on your bills. If you use our energy switching service, This is Money gets a small payment that helps keep our site free to read.
THIS IS MONEY’S FIVE OF THE BEST CREDIT CARDS
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