Guide to taking control of your debt and improving your debt health

As of June 2014, the average total debt of a UK adult was £28,677, with average annual interest repayments for each person at £1,171.* Mortgages, loans, credit cards, overdrafts – whatever the source, most of us have some debt. But with high interest rates affecting repayments, a lot of people may not know how much money they actually owe, and whether they could improve their debt situation by making some simple changes.

So if you feel that you should have already paid off lingering debts or are getting into further debt to stay afloat, a debt health check may be useful.

This check will look at improving your debt situation – whether this is as simple as moving your debts around to pay less interest, or tackling debts that are mounting up and bringing your finances back into control.

Take control

If your debts are mounting up, it’s important to face the issue so that you can get it under control, otherwise you could end up in an extremely vulnerable situation.

The first thing you need to work out is how much you actually owe and who you owe it to. Then you can prioritise your debts. The most important debts are those that could see you lose assets such as your home or your car. So if you have rent or mortgage arrears these need to be tackled first. After this you should ensure that any tax debts such as council tax are paid.

For other debts such as overdrafts, or store cards, talk to the company directly and explain your situation. Most companies would prefer to help you come up with a repayment plan rather than having to recover the funds in some other way. Don’t be tempted to agree to repayments you won’t be able to afford, it will only make the problem worse.

If you have a credit card, find out if you are able to transfer your balance to a 0% interest card. Make a repayment plan covering the 0% period and destroy your credit card so you can’t keep using it. Balance transfer charges may apply with this option so make sure you read all the terms and conditions of a credit card and that you have funds available to pay any fees such as these.

Depending on your circumstances, it may be a suitable option to consolidate your debts and make repayments through a specialist debt service. You should talk to a debt advisory service before taking this option.

Once you have worked out a realistic repayment plan for your debts you should look at how you got into debt in the first place. If it was overspending on a one time basis then recognise this and don’t be tempted to turn it into a habit or your debt will turn into a more serious problem.

Whatever you do, don’t take on any new debt. If you are having serious issues repaying your debt, or got into debt because you are struggling to make ends meet, you need to seek advice from a free independent debt advice service such as the Citizens Advice Bureau.

Our Guide To Taking Control Of Debt has further information on spotting the warning signs of debt, a check-list to help you prioritise your debts and some helpful contacts.

Improve your debt health

Even if you have minimal debt and are not finding it a struggle to make repayments, there are still ways to reduce your debts sooner and you may improve your credit rating while doing so.

For example, are you making the minimum monthly repayments? If so, it could mean that you are only paying off the interest and not the debt itself.

The average credit card debt per household in June 2014 was £2,154. For a credit card bearing the average interest rate, it would cost £54 a month to clear the debt in five years, or £38 a month to clear it in ten years.* As mentioned above, transferring credit card debt to a card with a 0% interest period could help shift some of the actual balance of your debt rather than chipping away at the interest.

For store cards, pay off one at a time, starting with the one with the highest interest rate. Once it’s gone you can focus on the next one rather than making small repayments to all of them each month and never getting any further forward.

If you have savings, you may be better off using them to clear your debt and begin saving again once your debts are cleared, rather than trying to repay your debts and save money at the same time. Interest rates for borrowers are higher than they are for savers, therefore you’ll be accumulating debt by interest a lot faster than you’ll be earning it on savings.

The same goes for your mortgage. Could you be getting a better mortgage deal? Depending on the terms of your mortgage you may be able to switch to a lower interest rate if it’s available. If you’re coming up the end of a fixed term on your mortgage, shop around for the best rate available; on average UK households with mortgages pay £3,725 in mortgage interest over a year.* By reducing the amount of interest you pay and keeping your monthly mortgage payments the same you can work towards paying off the mortgage rather than the interest.

Download our handy Guide To Improving Debt which contains further information on reducing different credit debt and improving your credit rating.

* (2014)