How To Get Out Of Debt

Earlier this year, Citizens Advice UK published a report summarising that the number of young adults getting trapped in a horrendous debt spiral has soared in the last decade with debt issues (minus student loan debt) increasing by over 20% in the last year alone. Debt is a real problem that needs to be dissected, discussed and dealt with. With talking about money still being a taboo in this generation, this short guide hopes to provide a hassle-free way of tackling debt head on. Please note that this does not apply to student loan debt that is dependent on income.

First, let’s define some key terms. Debt in this context is anything owed or borrowed requiring repayment. The creditor is the entity to which this debt is owed i.e. the bank, your phone company, a payday loan lender, a parent, a friend, a neighbour, etc. This short guide focuses on unsecured debt (any debt not secured by property/guarantor/assets which usually have a high-interest rate attached) e.g. overdue bills.


Recognise that you are in debt

It’s one thing to be aware that you’re in debt; it’s another to acknowledge that your debt has an impact on your credit rating, your livelihood, your health and more importantly, your peace of mind. If you are still reading this, that’s great because having the right attitude is the first step to digging free. In a safe place only accessible to your eyes, list down the creditor(s) and the amount(s) owed then total the amounts.


Identify your average monthly disposable income

Knowing how much disposable income you have is crucial to deciding if you can afford to pay your debts and how quickly you can pay them. Your monthly disposable income is the money left every month after your expenses have been subtracted from your total income that month.

Your monthly expenses should include expenses that are regular so if you’re a sucker for Starbucks every morning, include it. Other examples include phone bills, transport, groceries, Netflix bill, rent, average electricity and gas bills, and any debt repayment schemes already established. Calculate the amount and note that down. If you’re not in a stable job, find an average of the amount you think you will earn every month for the next 3 months.


Contact your creditors

If you’ve been avoiding your creditors, especially in the way most people do, by recycling that “your bill is now overdue, please respond or you will be passed onto a debt collection agency” letter, pick up the phone and give them a call or write a letter. Before getting in touch, ensure that:

  • You contact the creditor with the most urgent (overdue) debt first
  • You have worked out how much you can afford to pay for each debt per month from your disposable income. It can be as little as £5 every month.

During the process, ensure that you get agreements confirmed in letters or emails addressed to you. If you feel the creditor is being unfair, you can raise the issue with the Financial Ombudsman.


Increase disposable income

Once monthly repayments are set up, it’s time to start looking at ways to clear them by increasing your disposable income. You can do this by:

  • Increasing income – selling anything in your house that no longer tickles your fancy on sites such as eBay, Depop and Vinted; getting a new job or even asking for a pay rise.

Increase repayments

So you’ve gone through the steps, your bank balance seems to be higher at the end of each month, and that extra money has got you pining for things you know you don’t need. Slow down. It’s important to recalculate your disposable income every month. By doing so, you are able to decide whether you can reduce your debt by increasing monthly repayments or by paying additional lump sums here and there. Ensure you keep a cash reserve of funds aside for a rainy day. Also be aware that depending on the interest rates, it may be more constructive to prioritise paying off your debts rather than paying into a savings account.

Working through the steps can seem daunting but having the right attitude with some financial goals in mind is always the first step. Finally, debt is a topic to that isn’t always discussed easily or freely, but there are organisations set up to help you get back on track for free. Citizens Advice UK, National Debtline and Step Change are all avenues worth researching to get away from debt and to help you start living the life you deserve.

This post was written by Joy.

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