What are your options for reducing your debt? Whether you just have debts you wish to reduce or have arrears you want to escape, this post will reveal some of the ways to reduce your debts and how to get started. Anyone with debts will want to hear this!
What are the different types of debt?
Debt can be categorised in many different ways, such as secured or unsecured debt. But one of the most important ways to categorise your debts is into priority and non-priority debt.
There are debts that are considered more important than other debts, and these types of debts are called priority debts. Some examples of priority debts are:
- Council tax
- Rent and mortgage debts
- Energy bills
- TV licence
- Court fines
- Tax credit or any other benefits that may have been overpaid.
Examples of non-priority debt include unsecured payday loans, credit and store cards.
Don’t worry, here’s what to do!
There are several debt solutions in the UK, choosing the right one for you could write off some of your unaffordable debt, but the wrong one may be expensive and drawn out.
Fill out the 5 step form to find out more.
How can I reduce my outstanding debt?
The easiest way to reduce your outstanding debt is to make payments towards the debt, preferably full monthly repayments to prevent any charges from being applied to the amount you owe.
There are various debt mitigation strategies and debt solutions that can help you reduce and/or get out of debt. We will be discussing these and point you in the direction of further information throughout this post.
How do I prioritise paying off my debts?
You should pay off the minimum payment required on all of your debts. This will ensure that you don’t go into arrears or further arrears.
However, there may be times when you cannot pay all of your debt monthly payments. On these occasions, you should prioritise paying your priority debts before you pay non-priority debts.
What happens if you can’t pay your debt monthly payments?
If you miss a monthly payment towards one of your debts, you will receive a communication from the creditor or company asking you to pay. You might have late fees and charges added to the amount owed.
If you miss multiple monthly payments (at least three), the company could send you a default notice, which gives you a final opportunity to pay before the debt is considered defaulted.
What happens next depends on the type of debt you’ve defaulted on.
For example, if it’s a secured debt the company could force the sale of the asset used as collateral in the credit agreement, which is usually a property. But If it’s not a secured debt, the company may take legal action to make you pay by asking a judge for a County Court Judgment (CCJ).
If you don’t pay or make an arrangement to pay after a CCJ has been issued, further action can be taken to make you pay, including the use of bailiffs. If you’re already at this stage of the process, it’s important to get information and know your rights. We have free guides to help you, which can be found via our debt information hub.
Could you write off some debt?
- Affordable repayments
- Reduce Pressure from people you owe
- One simple monthly payment
Can I negotiate with my creditors?
Yes, if you’re struggling to pay debts it’s important to communicate with creditors and negotiate a new affordable payment arrangement.
Creditors may be sympathetic to your situation and offer reduced payment plans or even a payment holiday to help you get through a difficult period. Some debt charities will offer to negotiate with creditors on your behalf if you’re worried about speaking to them directly.
Does being in debt affect my credit score?
Being in debt can positively or negatively affect your credit rating depending on how you’ve handled your debt.
If you have debts that you’ve kept up with through timely monthly payments, you may have improved your credit score because it shows you can manage your finances and debt repayments effectively.
However, if you have missed payments and arrears, these debts will negatively affect your credit report, which makes it harder to secure credit in the future.
How to take control of debts
If you have debts you just want to pay off or have debts that are now unaffordable, you can take control of the situation. The best way to do this is to speak with a debt adviser working for a debt advice charity.
Debt charities in the UK offer a free and confidential debt advice service where they will assess your individual situation and suggest the best solution for you.
How can I reduce my debt quickly?
You can reduce your debt quickly by committing to a debt mitigation strategy, such as debt consolidation, the snowball method or the avalanche strategy.
Debt consolidation focuses on reducing the amount of interest owed on your debt by merging multiple debts into a new debt with a lower interest rate. Whereas the snowball method and avalanche strategy both focus on making all minimum repayments and overpaying on a specific debt to reduce overall debt in a quicker time.
Debt charities can discuss these options with you if relevant. But they might recommend another solution to reduce your debt and escape it completely.
What’s the best way to get out of debt?
There isn’t one best way to get out of debt. Everyone’s debt and financial situations are different, so one way out of debt might be the best strategy for one person, but not ideal for someone else.
The good news is that there are many ways to get out of personal debt, which accommodate different situations regarding the amount of debt and income you have.
Reducing Credit Card Debt
If you’re only dealing with credit card debt, you might be able to get it reduced without entering into any formal insolvency solution. The very first thing you should do when addressing credit card debt is to stop using it for any transactions if possible.
Next, you should try calling your credit card company and explaining your situation to them. You’d be surprised at what can be achieved with a simple phone call. Inform them of your financial circumstances and always mention that you can provide proof and documentation of it if needed as well.
As a result of this, your credit card provider might lower your interest rate or they might be able to give you a payment break to get your financial affairs in order. Another thing you can do with credit cards is transfer your balance to one with a lower interest rate in order to reduce your debt.
So, let’s talk about credit card balances and balance transfer credit cards, otherwise known as debt consolidation for credit cards.
The way this would work is that if you have an outstanding balance on your credit card, you would transfer that balance onto another credit card that has a rate of interest lower than the one on your initial credit card.
In this way, you would lower the amount of interest you have to pay, thus, lowering the amount of money you have to pay overall.
One thing you have to keep in mind when using balance transfer between credit cards is the fee for transferring the outstanding balances. Some credit cards have very high fees which would defeat the purpose of lowering your debt in this way.
Debt consolidation loan for personal loans
It’s possible to reduce the interest and therefore reduce your debt on personal loans too. Just like you can consolidate credit card debt into a new balance transfer card with lower interest, it might be possible to do the same to a personal loan.
For example, you can take out a new loan covering the amount needed to pay off two or more existing loans and any early repayment charges. The new loan should have a lower interest rate to ensure you save money over the course of future repayments. This might be made possible with debt consolidation loans, which are a type of loan used specifically for this purpose.
What are 3 ways to get out of debt?
Three common ways to get out of unsecured debt – which could be recommended to you by a debt charity – include a Debt Management Plan (DMP), a Debt Relief Order (DRO) and an Individual Voluntary Arrangement (IVA).
We’ve explained how these work below.
Debt Management Plans
Debt Management Plans are an informal debt solution that – when agreed – allow you to make a single affordable repayment each month, which gets split between creditors. They can be set up and negotiated directly, or debt charities can do this work for free on your behalf.
Debt Relief Orders
A Debt Relief Order is an insolvency solution for people who cannot afford their debts and have little disposable income each month and no valuable assets. When set up, it stops all creditors from contacting you or taking further action for one year. At the end of that year, all debt is written off if your financial situation hasn’t improved.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement is like a Debt Management Plan but it’s a legally-binding solution. Monthly repayments will last for five or six years and at the end of the IVA, all outstanding debt will be written off.
Are you struggling with unaffordable debt?
- Affordable repayments
- Reduce pressure from people you owe
- Lower monthly repayments
How can I get out of debt with no money?
If you have no or little disposable income each month, a Debt Relief Order could be the best option to get out of debt. If you have debts worth more than £30,000 or £20,000 in Northern Ireland, you may have to consider bankruptcy instead.
Can I get out of debt and save at the same time?
If you can meet minimum monthly repayments on all of your debts, you can theoretically save all other disposable income. However, some debt solutions might require you to pay other disposable income to your debts, so it might not be allowed in some cases.
It might not be financially wise to try and save while paying off debts. It could be better to pay off more of your debt than it is to save. Read on to uncover why.
Is it better to pay off debt or save money?
The interest applied to most debt is likely to be higher than the interest you can earn using a savings account. Thus, by overpaying on your debts you could save more money in interest payments than the interest you would earn by saving that money.
This shouldn’t be considered as advice because each situation is different and there could be other factors to consider, such as overpayment or early repayment charges on your debts.
What does it really mean to be debt-free?
If you don’t owe money to any company or creditor then you can be considered completely debt free. Most people have some type of debt, such as mortgage debt or student loan debt. So it’s quite rare to be completely debt-free unless you’re nearing retirement.