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13 ways to get out of debt

Debt affects millions of people in the UK. Recent figures from Credit Action show that the average household debt in the UK (including mortgages) in May 2012 was £55,514. Outstanding personal debt in the UK stood at an eye-watering £1.460 trillion at the end of May 2012.

Tackling your debt can be a frightening prospect. You may feel that you are trapped in debt and that there is no way that you can improve your situation and start repaying what you owe. However, there are lots of ways that you can get out of debt. Our guide looks at 13 ways that you can proactively deal with your debt.

1. Tackle your debt

If you have a problem with debt, it's important that you don’t bury your head in the sand. Your debt won't go away on its own. While it may be stressful or challenging to tackle your debt, your first step has to be to positively tackle your issues.

To deal with your debt problem, you will need to work out how much money you owe and to whom. After that, you can come up with a plan for tackling your debt. The remainder of this guide will give you some invaluable tips for getting out of debt.

2. Prioritise your debts

Once you have worked out how much you owe and who your creditors are, you need to work out which debts are the most urgent.

Some of your debts are more urgent than others because the consequences of not paying them can be more serious than for other debts. These are your ‘priority debts’.

Priority debts include:

  • Your mortgage or rent arrears. If you don't pay these, you could lose your home
  • Your council tax arrears. If you don’t pay these you could end up in court and a bailiff may be instructed to take your belongings. If you still don’t pay you could be sent to prison
  • Your gas and electricity arrears. If you don't pay these, you can have your energy supply disconnected
  • Any court fines such as magistrates' court fines. If you don't pay these, the court can instruct bailiffs to take your goods. And you could ultimately be sent to prison.
  • Your maintenance arrears payable to an ex-partner or children, for example payments to the Child Support Agency. If you don't pay these, a court can instruct bailiffs to take your belongings and you could ultimately be sent to prison
  • Any income tax or VAT that you owe. You can be sent to prison for non-payment of income tax or VAT

When tackling your debts it is vital that you deal with your ‘priority debts’ before you deal with other less urgent debts such as credit cards, personal loans and store cards.

3. Avoid fees and charges

A good way to repay your debt more quickly is to avoid adding to the debt. If you make your payments late then you are likely to incur fees and charges from your lender. You may also lose your entitlement to the special interest rate deal that you have.

In addition, be careful not to pay any other financial fees such as ATM charges or booking fees.

4. Make more money

A great way to help you reduce your debt is to increase your income. While not everyone has the opportunity to work overtime or to take on a part-time job to supplement their income, there are lots of other ways that you can make additional cash to help you repay your debts more quickly.

One good way of generating extra money is to convert something you already own into cash. For example, you could sell one of your major assets, such as a house or car. This is particularly a good idea if you can no longer afford the payments on your house or car – or if you own a second house or car that you do not need.

With the proceeds of the sale of a major asset, you will have to pay off anyone to whom you pledged the asset as security (for example your mortgage lender). Any surplus monies left over from the sale can be used to pay off some or all of your other debts. Even if nothing is left, eliminating what may be a sizeable monthly payment may help you to cope with all your other bills.

You can also consider selling items that you never use or do not need any more. Thanks to the internet, it has never been easier to sell goods that you have no use for. Auction sites such as eBay will let you sell all your unwanted items in order to generate cash which you can use to repay your debts.

If you do not wish to sell online, there are always the traditional ways to sell:

  • Place an classified advertisement in your local newspaper
  • Take a stall at a car boot sale
  • Take good jewellery to a jeweller who sells second-hand items
  • Sell at a local auction house

Another good way to make more money is to check your eligibility for any Government benefits. If you are made redundant from your job then you may be eligible to apply for Jobseekers Allowance and other Government aid such as council tax benefit.

You may also be eligible for other benefits such as tax credits. Working tax credit and child tax credit are available to people and families on low incomes – with or without children. Claiming any tax credits that you’re entitled to can help you generate more income to pay off your debts.

5. Consolidate your debt

If you have a number of different debts such as loans, overdrafts and credit cards, consolidating your debt could help you to pay it off more quickly.

A debt consolidation loan lets you borrow a lump sum in order that you can pay off some or all of your other debts. Interest rates on a debt consolidation loan are typically lower than on other types of borrowing, meaning you can end up paying less interest. In addition, a debt consolidation loan can simplify your finances. Instead of paying lots of smaller payments to a range of creditors every month, a debt consolidation loan means you pay just one monthly payment to one lender.

6. Control your spending

If you want to get out of debt it is vital that you keep a careful eye on your spending. There is no point coming up with a careful plan to get out of debt and then using your credit cards regularly to build up more debt. Similarly, it would be foolish to consolidate your debt and then continue to rack up balances on your credit cards.

Once you have started to repay your debts, stick to your spending plan. If you don’t, you may simply end up in the same position further down the road.

7. Reduce your other outgoings

Another excellent way to improve your financial situation and to generate cash to repay your debts is to reduce your expenditure.

The ways in which you reduce your outgoings will largely depend on your income, the amount that you owe and your standard of living. If you have a large income but also high expenses and a lot of debt, you may need to review your priorities. What you should do is determine what your essentials are and what items you can cut out.

Of course, if you can reduce your outgoings this will leave you with more cash to go toward repaying your debt. Some easy ways that you can reduce your expenditure include:

  • Eat at home and reduce your takeaways or restaurant meals
  • Borrow books, CDs or DVDs from your local library rather than buying them
  • Change your car for something less expensive and more fuel efficient
  • Reduce your food bills by using coupons and vouchers and buying ‘own brand’ goods
  • Move to a smaller/cheaper house
  • Reduce the amount you spend on holidays or stay at home
  • Buy second hand clothing, furniture and appliances or use auction sites such as eBay
  • Reduce the amount that you spend on birthdays and Christmas
  • Cancel your satellite television subscription, or at least the premium channels
  • Be energy efficient at home. Turn off your lights and electrical appliances when they are not in use. Run the dishwasher and washing machine with full loads, at lower temperatures and less frequently

8. Shop around for financial products

For many people, a significant proportion of their monthly outgoings are to financial products. You may have direct debits for life insurance, buildings and contents cover, car insurance, credit cards, personal loans and even pet insurance.

One way to get out of debt is to save money on these payments. It has never been easier to shop around for financial products and there are plenty of comparison websites that allow you to compare both the cost and the quality of financial products. Simply by finding cheaper insurance, you could save money which you can use to repay your debts.

9. Pay off expensive debt first

Once you have dealt with your ‘priority debts’ (see above) you should then tackle your most expensive debts. Use any surplus cash to reduce the expensive debts first in order to save money on interest payments.

For example, some store cards can have interest rates in excess of 25 per cent, so you should work out what interest rate you are paying on your debts and tackle the most expensive debts first.

10. Try to make more than the minimum payment

If you only make the minimum payments to your debts then you may find that it takes you years to repay the debt. Simply making the minimum payment to a credit card at an APR of 20 per cent will take you years to repay what you owe and you may end up paying more than you borrowed in interest.

If you can, always pay more than the minimum every month.

11. Track your progress

When trying to repay your debt, it is important that you monitor your progress to becoming debt free. This has two main benefits. Firstly, it will help you to check that you are making progress towards clearing your debt. Secondly, it can be a motivating factor to see your debt shrinking on a weekly or monthly basis.

12. Keep in touch with your creditors

If you are struggling to repay your debt it may pay for you to keep in regular contact with your creditors. For example, they may agree an arrangement for you which will enable you to pay a lower monthly amount.

By telling the lender the reasons you got into debt and writing to them with your plan they are likely to be sympathetic to your situation.

13. Formal debt solutions

For some people, a formal debt solution may be the only solution to their financial problems. If you have tried a range of approaches, you may end up with no choice but to consider a formal solution to your debt problems.

It is worth remembering that just because you are in debt; it does not mean that you have to become bankrupt. There are various alternative methods of dealing with debt including:

  • Individual Voluntary Arrangements (IVAs)
  • Debt Relief Orders (DROs)
  • Debt Management Plans

If you have exhausted all other options, one of these formal solutions may be the best way for you to tackle your debt.

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