Getting out Of Debt – Complete Overview
For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.
Falling into debt is incredibly easy if you’re not careful about how you spend your money.
On the other hand, getting yourself out of debt can prove to be extremely difficult. You may find yourself dealing with creditors who are pressuring you to make payments you can’t afford.
This is why today, I’ll be looking at what steps you can take to make the repayment process easier so you can get yourself out of debt as soon as possible.
The Rights You have
When you owe a debt, creditors are going to start contacting you and start asking about how you intend to pay back that debt.
While it’s true that creditors have the right to contact you via letter, phone call or a home visit, it’s also true that they have to abide by a certain set of rules.
These rules are put in place in order to ensure that you, the debtor, gets treated fairly.
For example, if you write a letter to your creditor and tell them that you prefer being contacted only through letters and not via phone or a house visit, they’ll have to agree to your request.
If you get in touch with a creditor and explain to them that you’re having financial troubles and you’re seeking help from a debt advice agency, they are obligated to give you some breathing space in order to sort out your finances.
Most creditors will give you about 30 days to sort out your financial affairs. Creditors are also obligated to do this for people if they show that they’re making an effort to pay back their debts.
Most creditors continue to add interest and charges while they pause your payments but with some creditors, you may even be able to get a lower interest rate.
Which Debts do I Pay Off First?
When you’re assessing the debts you have, the first thing you should do is separate them into secured/priority debts and unsecured debt(s).
It’s important that you pay off your priority debt(s) first before you start making payments towards your unsecured debt(s).
This is because priority debt(s) have much dire consequences if they are left unpaid. For example, not paying your mortgage payments could lead to your house being seized.
Once you’ve taken care of your priority debt(s), you can start focusing on unsecured debt(s).
If the only types of debt you have are unsecured, then you should give priority to the debt with the highest rate of interest. You should always strive to pay off debt with the highest rate of interest first when it comes to unsecured debt(s).
Credit Card Balance Transfers
Some people utilise their credit cards to reduce the amount of money they have to pay back.
People do this through something known as a ‘balance transfer’. A balance transfer, as the name suggests, is the process of transferring your outstanding balance from one credit card to another.
How will this reduce the amount of money to pay, you ask? Well, that’s where interest rates come into play.
What you’re doing here is that you’re transferring your outstanding balance from a credit card with a high rate of interest to a credit card with a lower rate of interest (or 0%).
Doing this will lower the amount of money you have to pay as interest and thus, will effectively reduce the amount of money you have to pay overall.
If credit card debt is the only type of debt you have then opting for low-interest credit cards to transfer balance to them is definitely something worth considering.
Debt Consolidation Loans
A debt consolidation loan is considered by a lot of people to be the best way to help you get out of debt.
It can work well if you have many different types of debt and you’re someone that’s having a tough time keeping track of all the creditors.
You would use this loan to pay off all of the debt(s) that you have. The benefit of this would be that all of your debt(s) would get merged into one.
Instead of dealing with many different creditors, you would only have to deal with one.
That being said, that’s not the only reason why so many people consider debt consolidation loans to be a great option to get out of debt.
In fact, that’s not even the main reason. The main reason is that if you can find a loan for debt consolidation that has a competitive rate of interest, you can effectively lower the amount of money you’ll have to pay.
The same principle applies here as the balance transfer method for credit card debt.
When you replace a debt you have to pay with a debt that has a lower rate of interest, you make sure that you’ll effectively be paying less in order to completely pay it off.
Other Debt Solutions
If the methods described above are not something that you think will help you, then you can consider other debt solutions available in the UK as well.
Some of the debt solutions are aimed towards individuals that can’t pay back their debt(s) at all whereas others are aimed at individuals that just need a more manageable way of paying off their debt.
Depending on your financial circumstances and how much money you owe, you may be able to find a debt solution that works perfectly for you.
Examples of debt solutions that you can look towards are:
- Individual Voluntary Arrangement (IVA)
- Debt Management Plan (DMP)
- Debt Relief Order (DRO)
- Debt Settlement Offer
A person who’s drowning in debt often sees no way out of it. For someone like that, it’s important to take a step back and assess their financial situation calmly.
This is the first step towards getting yourself out of debt.