How to get out of debt in 2021: Seven tips for a brighter financial future

Last year was tricky for many. With the coronavirus pandemic causing havoc in mid-March, many were furloughed or lost their jobs.

It might have resulted in a struggle to make ends meet and turn to credit as a result – or maybe extending the debt they were already in.

Around three in 10 Britons have been negatively financially hit by the pandemic, with around £10billion of personal debt built up as a result according to StepChange research.   

Rachel Springall of Moneyfacts said: ‘The impact of the pandemic on consumers may well have prompted them to take a step back to reassess their financial health and find ways to improve their situation.’

‘Clearly the resilience of consumers finances will continue to be tested throughout 2021 and the impact of this year could well be felt many years to come.

‘If consumers can put aside a little time, they could start to build a solid foundation for a brighter financial future with just a few simple steps and by taking advantage of free planning or support.’ 

A new year and a new start. This is Money speaks to the experts for advice on how to get out of debt in 2021.

1. Prioritise what you owe

When in debt it is important to face up to what you owe and not bury your head in the sand. 

Work out what you owe and to who – as well as when you owe the money by. 

Take time to dissect finances and consider using free apps like Money Dashboard which can make it easier to work out where there is overspending and that 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. 

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

Springall said: ‘One of the first steps to a brighter financial view is to dissect household income and outgoings. 

‘If consumers can break down where they are overspending and what they could look to rein in on, it can make a world of difference.

‘Starting a simple spreadsheet and keeping tabs on household bills and upcoming expenses, like holidays and birthdays, can help customers from being cut short.’ 

Sarah Porretta, strategy and insights director at Money and Pensions Service added: ‘A key first step can be to reach out to a family member, friend or professional to share the emotional burden money worries can bring.

‘Then, write down everything you owe so you have a clear picture of your debts. You should pay any priority debts first, such as mortgage, rent and energy payments, before debts like credit cards and personal loans. 

‘Once you have paid off your debts, you can start to build up a savings buffer. You can use budget planning tools to work out how much you can afford to put away each month.

‘Most importantly, if you’re worried you’re in debt, seek help quickly as the sooner you act, the easier it will be to manage.’ 

If in debt, it is important to try and make a plan to ensure you can make manageable payments

2. Consolidate your debts

Another way to ensure you are on top of your finances is to consolidate your debts.  

Andrew Hagger of Moneycomms said: ‘If you are always juggling your credit card balances, your overdraft or repayments on your car loan, perhaps it’s time to consider combining 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.

Interest rates are still historically very low but be prepared for lenders to take an extra close look at your application at the moment.

However, the Covid crisis has seen may people furloughed and lenders are understandably more cautious about borrowers and their future employment prospects at the moment.

Springall said: ‘If consumers were to default on credit in difficult times, credit cards would typically be the first form of finance to be hit to cover household expenses, after an overdraft of course, thereafter it would be unsecured personal loans, and none of these are secured to someone’s home or other forms of equity.

‘Therefore, the element of risk on unsecured loans 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.’

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.

Therefore, the rate seen at first glance right now is not guaranteed to be the same as the rate offered after the application process, nor the rate available moving into 2021.

Research from Moneyfacts in December 2020 shows that the average rate on an unsecured personal loan this month was 7.2 per cent when based on getting a loan of £5,000, which are not restricted to one term. 

4. Switch credit cards

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

This will ensure 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: ‘The most cost-effective deal depends on how long consumers feel comfortable to pay back their debts.

‘For example with 0 per cent balance transfer cards, the top deal from TSB for 29 months charges a transfer fee of 2.95 per cent which is a charge of £88.50 on a debt of £3,000, but there are fee-free options available elsewhere.’

Some of the top fee-free balance transfer credit cards on the market today are from Santander and Sainsbury’s Bank – both of which have a 0 per cent balance transfer term of 18 months.

Therefore, if consumers can pay off their debt within this period, £167 per month approximately for a £3,000 debt, they would save themselves £88.50 compared to the longest 0 per cent balance transfer offer on the market.

Consumers are advised to check their credit score before they apply for a credit card, such as with Experian, to ensure they are in the best possible position.  

Springall added: ‘Those consumers who used a credit card to pay for some of the festive season may be looking to acquire a 0 per cent balance transfer card, but if they do then they would be wise to make fixed repayments.

‘For instance, 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.’ 

Overdrafts have also been hiked dramatically this year with some customers seeing charges of 40 per cent.  

Andrew Hagger of Moneycomms: ‘2020 was the year when overdrafts suddenly became very expensive with most banks now charging between 35 per cent and 40 per cent for agreed current account borrowing.

‘If you only dip into the red for a day or two now and then it’s not so much of an issue, but if you find yourself overdrawn for the majority of the time, it’s time to look for a cheaper alternative.’ 

Springall added: ‘The fixed overdraft fee ban from the FCA that shook up the market will provide more transparency to consumers to compare tariffs, but the rise to overdraft interest rates does mean that using an arranged overdraft can be more expensive than using a standard credit card. 

‘In the months to come, it will be interesting to see how banks and building societies adjust to the challenging market conditions, particularly if they offer an attractive incentive package of either high credit interest or other benefits.

‘Consumers may well be looking to rein in their finances and search for an account that can work harder for them, especially if they currently hold an account with a less attractive package or feel they are getting a poor level of service.’

Below is a list of the best credit cards for zero per cent balance transfers: 

5. Cut down on spending

Cutting down on non essential spending could help you tackle debt quicker. Hopefully, for some, this will be easier with many stores closed around the UK.

Every pound you can save is an extra pound you can put towards reducing your debts, so look for ways to reduce your monthly outgoings, such as cancelling any old direct debits that you don’t make good use of, for example, magazine subscriptions or gym membership.

Cut down on shop bought coffees or that beer after work and make your own packed lunch rather than buying expensive shop bought sandwiches.

It may sound a bit mundane, but the savings can soon add up – try it for just one month and write down how much you save.

There’s no reason why you couldn’t be £50 or more better off each month – that’s an extra £600 in 12 months you could knock off your debt.

7. Switch to better deals – and save

Many customers currently suffer from the loyalty penalty where firms charge their existing customers more than new ones.

As such, it is always a good idea to use price comparison sites to see if you could save money by switching providers.

This goes for all sorts of bills including energy, mobile, broadband and TV packages.

Switching energy supplier can save you hundreds of pounds a year with the cheapest fixed-term tariff currently on the market coming in at £209 cheaper than the £1,042 energy price cap, according to data from Compare the Market.

Calling up your current providers is also a good idea. Research some of the best deals on the market and advise them you are thinking of switching unless they can match it.

In many cases, you will find yourself walking away with a smaller bill.