Take back control, look your debts in the eye
Is your debt becoming a problem? Unsure whether you can keep up with your payments for your mortgage, rent, energy bills? Are you paying only the minimum balance on your credit cards? Do you feel you are losing control or feeling trapped by your money worries?
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Managing debt is difficult and it can become a massive psychological burden, especially as it feels as though you are completely on your own. Receiving endless payment reminders and watching the totals mount up would test the optimism in any of us, because we process the situation as a sign of personal failure rather than as a problem we can solve. Many will start to push the problem out of sight and avoid opening those angry looking envelopes. There is still a lot of shame associated with battling debt and it remains a bit of a taboo topic to bring up. As a society we are very limited in the way we talk about money and the emotional toll that worries and debt can take on professional self-esteem and mental health. But it needn’t be this way. You really need to make a plan and focus on it, according to the Citizens Advice Bureau. The best way to tackle this is by taking small, incremental steps: dealing with one bill at a time.
Get some help
In a moment we will look at the different ways to approach the problem, but know that you definitely don’t need to do this on your own. Don’t hesitate to ask for help – there are some great places where you can get FREE debt advice as well as phone support and online tools, such as Citizens Advice, StepChange Debt Charity, National Debtline, PayPlan, and Mental Health & Money Advice.
By approaching repayments methodically, clear-sightedly (that is, not being in denial) and with a doable repayment plan, you should gradually get out of debt. It might take a while, but you will feel so much better, and more in control, knowing that every day you are getting closer to your goal. You will gradually stop making the common mistakes that can actually increase the amount you have to repay too. Making progress will help you to feel lighter and more empowered. As you reduce your debt, you will have less interest to pay too. Plus, it will have the added bonus of giving you give a real boost to your credit profile.
Which debts should I pay first?
The first rule of getting out of debt is to make sure you are dealing with the most important debt first. Some repayments are more important than others because of the consequences of missing them. Priority debts are mortgage payments, rent, council tax, taxes, store cards, charge cards, hire-purchase fees, water bills, etc. The result of not paying your mortgage payment for example, could mean losing your home (in a worst case scenario). Non-priority debts are credit cards debts, payday loans, overdrafts, and money owed to family and friends. Not paying these debts back straightaway is less serious, though the delays can cost you a lot of money and goodwill.
Priority debts: Priority debts such as your rent or mortgage should be paid in full every month. If you fear that you may miss a payment, contact your provider in advance to let them know and make an arrangement with them. Now, if you can’t pay them because you have too much debt, you need to get debt advice as soon as possible.
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Non-priority debts: If you can’t pay your non-priority debts, your creditor could eventually take you to court or ask you for more money. It is important to keep the lender informed and to make an arrangement to pay at least the minimum amount on all debts to avoid falling behind.
Let’s run through this in more detail:
1. Stop blaming yourself – but do start taking responsibility: This has nothing to do with your self-worth. Be practical and take action. Repeat: 'This happens to many people and I can get myself out of debt.'
2. Commit to not taking on any additional debt: Before you do anything else, cut your spending. This sounds obvious but it can be hard to do. Many people react to maxing out on one credit card by applying for another, which leads to disaster. It really is quite simple: stop using that credit card! Freeze it or cut it up. You have nothing to lose but stress.
3. Face it and write it down: Take a pen and paper, copy out the below chart and write down everything you owe. Make a list of all your debt on one sheet. Collate your latest statements, take a deep breath and open bills.
Find out the following:
• What non-priority debts do you have?
• What annual percentage rate (APR) are you paying on the interest?
• How much do you owe in total?
• What is your monthly payment?
• Order your debts, listing the debt with the higher interest rate first. You will now clearly know what you owe, in which area of your life your debts are located, the terms of the loan and interest payment due on each.
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4. Use a debt repayment method: There are a few debt repayments methods, the most user-friendly are called the debt avalanche and the debt snowball.
• The avalanche method is when you allocate money to cover the minimum payment on each debt, and use any funds left over to repay the debt bearing the highest interest rate/APR; that is, the card that is most expensive is the one you pay off first.
• The snowball method is when you allocate all of your extra money towards covering the minimum payment on each debt, and the extra money available then goes toward paying off the debt with the lowest balance first. If you feel overwhelmed at the thought of tackling all your debts at the same time, this method allows you to focus on just one.
The avalanche method often makes the most economic sense but the snowball method can be the more motivating because it allows you to eliminate debts one by one. Since you begin with the lowest debt balance, it will help you to feel as though you are making progress.
5. Order your debts: Based on your debt table, order the debts according to the debt repayment method you’ve chosen. Include the minimum due every month in the table.
6. Get started: Make a budget, identifying what you want to achieve versus what you need and check all your spending. What can you cut back on? It’s going to be hard but needs to become your top priority. It will allow you to release some cash to start repaying some of your balances – and just picture the financial freedom…
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Instead of paying off the minimum each month you can also transfer the debt to a zero-interest card, look at the balance and see exactly how much you should repay to get the amount down to ZERO. However, be careful, as if you are feeling vulnerable to the £££ pressure you could be tempted to access fast cash without examining the ever-more painful consequences (hello payday loans).
7. Celebrate: Share your new debt-free status with your friends, family and community.
If you or someone you know is experiencing anxiety, depression or other mental health issues related to money, please get help. Call Mind on 0300 123 3393 or text 86463.
