7 Solutions on How to Get Out of Debt

Have you recently found yourself in too much debt? It’s not too late to improve your financial health. Everyone needs a little help occasionally. You’re not the only person seeking help to pay off debt, as people in the UK collectively owed £1,837.4 billion at the end of January 2023.

So, we're all becoming more financially aware and looking to better our financial situations. Debt can weigh you down and make you feel not-so-good about the future, but with a great strategy, you can fix this.

If you're seeking advice and valuable strategies to help you tackle that looming debt, you’ve come to the right place. In this guide, we’ll help you make sense of your debt, provide you with seven tried and tested strategies to help reduce your debt, and provide tips for when you’re debt free.

Establishing Types of Debt

Before you start eliminating your debts, it’s a good idea to determine what category your debt falls into.

Loans and other types of finance available to consumers fall into two main categories: secured debt and unsecured debt.

The two types of debts:

• Secured debt: when you have secured debt, it means you’ve put forward some form of an asset as collateral for a loan. So, if you can’t pay, the lender can seize assets to collect the funds. The most common types of secured consumer debt are auto loans and mortgages.
• Unsecured debt: when you have unsecured debt, it means that anything you’ve borrowed was based solely on your credit history. No collateral is lost if you can’t repay an unsecured loan. Typical unsecured debts include personal loans and credit cards.

Now that you know the different types of debts, you should be able to categorise yours accordingly. Let’s start tackling your debt.

First Steps to Get Out of Debt

Sitting down, creating a plan, and having direction on paying the debt will help you become closer to debt freedom.

How to start managing your debt:

• Make a list of all your debts: working out your overall debt amount can help you better understand what you’re working with.
• Workout monthly payments: work out your monthly income and outgoings; from there, use the money left over in your bank account to see how much you can afford to pay your debt.
• Use a debt repayment strategy: there are different strategies you can use to reduce your debt, from debt consolidation to declaring bankruptcy. You’ll later read out seven recommended repayment strategies to help you get out of debt.

Make a List of All Debts

Making a list of your debts enables you to determine how much you owe. Breaking each debt down will help you create an accurate payment plan for paying off your debts.

Factors to include on your list:

• Each debt and who they’re with, so any credit card debt, auto loans, or personal loans.
• Next to each debt, write down payment dates and interest rates.
• Work out how much each minimum payment is.

If you’re unsure of your overall debt, you can check your credit file, and it should tell you your debt utilisation, credit score, and any other factors relating to your credit rating. You can check your credit report via a credit reference agency. The top three in the UK are Experian, TransUnion, and Equifax.

Workout Monthly Payments

You’ll have a total of your collective debt using the list you just created. This next step focuses on how much money you can afford to pay off your monthly debt. Each month as you pay more money towards your debt, your debt reduces and your credit rating increases.

So, after you’ve worked out your month’s outgoings — you can use a spreadsheet, budgeting app, or a simple notepad to jot down your calculations. After subtracting bills, utilities, and basic expenses from your salary, determine what’s left after deducting taxes.

You're off to a great start if you have enough money to pay all your debt minimums. If not, you must improve your cash flow by increasing your income or cutting expenses. Consider taking extra shifts at work if you can, or talk with your employer about getting a well-deserved raise.

Regardless of cash flow, it could help if you look for opportunities to save money where you can — at least until you’ve cleared all debt. You can try saving money by finding ways to spend less or negotiating your utilities and other services.

Use a Debt Repayment Strategy to Get Out of Debt

Making minimum monthly payments is a good way to start getting out of debt. But to make a dent in your debts, a debt strategy plan can help you reduce debt faster. There are seven repayment strategies you can choose from to get out of debt:

• A debt management plan: a repayment plan you and your creditor agree‌ to.
• A debt consolidation loan: allows you to merge multiple credit commitments into one loan.
• A Debt Relief Order (DRO): if you can’t afford to pay your debts, a DRO gives you breathing room as it allows you not to pay certain debts for a specified period.
• A balance transfer card: if you’ve got credit card debt, you can use a balance transfer card to move debt from your existing card to another card with a lower interest rate.
• The debt snowball method: you start repaying debt with the smallest amount first and work through your debts until they’re all paid off.
• The debt avalanche method: you start paying off your debt with the highest interest rate first and continue to pay off your debts from highest to lowest.
• Individual voluntary arrangements (IVA): a legally binding agreement between you and your credits to pay back your debts over an agreed period. The courts must approve the IVA, and you and the creditor must stick to it.

The more you can pay off your debt, the quicker you’ll be able to get out of debt. We explore the seven strategies more in-depth in the following section.

7 Debt Repayment Strategies to Help You Get Out of Debt

You can reduce your debts faster by choosing one of the following seven strategies.

1. A Debt Management Plan

A debt management plan is an agreement between you and the creditor you’re in debt with. You agree on a fixed amount to pay off your debts over an agreed period. The agreement isn’t legally binding but is a good option if you can only afford to pay back a small amount each month.

Advantages

✔️ Reduced monthly payments.

✔️ You may be offered a lower interest rate for your new repayments.

✔️ Your credit rating should increase over time.

Disadvantages

❌️ Some companies will charge extra for handling and set-up fees.

❌️ Creditors can take action against you to recover their money — even if you keep up with payments.

❌️ As this solution isn’t law-binding, creditors can ask you to pay off your total debt anytime.

2. A Debt Consolidation Loan

A consolidation loan is a good solution if you have too much debt across multiple credit commitments. Taking out a loan to cover all your debts in one go is a fast way to get out of debt, as it makes it easier to make payments — you only have to make one monthly payment.

Advantages

✔️ Reduces your monthly debt payments into one single payment.

✔️ If your credit score has improved since taking out your other debts, you could be offered a lower-interest loan.

✔️ Your credit report could improve, as you’ll pay off all debts.

Disadvantages

❌️ You may have to pay other fees like origination, balance transfer, and closing costs.

❌️ If your credit score isn’t high, you may be offered an interest rate higher than your current debts.

❌️ If you miss loan payments, you risk harming your credit report.

3. A Debt Relief Order

If you struggle to pay back your debts, a DRO might solve your problems. When you apply for a DRO, your debt is quashed for a specified time — usually 12 months. The debts are cleared after the DRO period, and you no longer have to pay them.

You'll have to repay creditors if you become more financially stable during the DRO period. 

Advantages

✔️ The process is relatively painless as there’s no court appearance needed.

✔️ A DRO covers most debts, including Council Tax and rent arrears.

✔️ Once you’ve got a DRO, creditors can take no further action against you.

Disadvantages

❌️ A DRO affects your credit report.

❌️ You can’t use a DRO for student loans, court fines and CSA payments.

❌️ You’ll not be eligible if you’re a homeowner or have equity that exceeds the asset limit.

4. A Balance Transfer Card

A balance transfer card is straightforward and useful if you’ve got debt across multiple credit cards. You can transfer the balance from one card to pay off another. The idea is to take advantage of much better interest rates.

Advantages

✔️ Consolidate your debts if offered a large enough balance.

✔️ Save money by choosing a card with lower interest rates than your current credit card.

✔️ Some providers have zero-interest introductory offers you can take advantage of.

Disadvantages

❌️ You may be charged a fee for balance transfers.

❌️ Most balance transfers require a good credit score to qualify.

❌️ You’re not decreasing your credit utilisation.

5. Debt Snowball Method

The snowball method helps you tackle your debt from the smallest to the highest. The idea is to make you feel good about getting rid of your debts; the smaller balances are the easiest to clear. Creating a dopamine rush every time you remove a debt will motivate you to continue until you’ve reached financial freedom.

Get out of debt with the snowball method in four easy steps:

1. List your debts from the smallest to the highest.
2. Make minimum payments across all your debt accounts, but leave out the smallest one.
3. Pay as much as possible on your smallest debt.
4. Clear all debt by repeating this process.

Advantages

✔️ Easy to get started.

✔️ Builds motivation by settling smaller debts faster.

✔️ You don’t need a lot of extra money to start.

Disadvantages

❌️ It can take longer to become debt-free.

❌️ Your higher debts may incur more interest, so the longer you leave those it could make your overall debt expensive.

6. Debt Avalanche Method

With the avalanche method, you tackle the highest-paying interest debts first and work your way down your debt list until your debt is cleared.

Get out of debt with the avalanche method in four easy steps:

1. List your debts from the highest interest rate to the lowest, calculating the total amount owed, minimum monthly payments and due dates. 
2. Budget beyond your minimum payments. Make all the minimum payments across your debts, and then calculate how much extra cash you can afford to put towards the highest interest rate account.
3. Once you’ve paid as much as possible on your highest interest rate debt, use the same amount to eliminate the debt on the following account.
4. Clear all debt by repeating this process.

Advantages

✔️ Become debt free faster.

✔️ Save money on interest.

✔️ Provides a structured approach for debt repayments.

Disadvantages

❌️ You’ll need extra money to put towards debt. You may need to pick a different method if you don’t have spare income.

❌️ It can be challenging to stay motivated.

❌️ It takes you longer to reduce the number of accounts with outstanding balances.

7. Individual Voluntary Arrangement

An IVA is a legally binding alternative to filing for bankruptcy. The courts will determine the agreement for you and the creditor, so you’ll have a set period to repay your debts. There are no minimum or maximum limits needed to take out an IVA. For debts less than £10,000, IVAs are not recommended due to high fees. 

Advantages

✔️ The payment is fixed and affordable, so you know how much you must pay each month until you’re debt free.

✔️ Interest rates and charges are usually frozen.

✔️ Protection from bailiffs and other legal action.

Disadvantages

❌️ An IVA will negatively affect your credit rating.

❌️ It isn’t private; your employer can find out about your IVA, which could affect your employment.

❌️ You may need to release equity from your home if you’re a homeowner.

Final Thoughts on How to Get Out of Debt

Once you’ve cleared your debt, you may want to use your credit or store cards again.

We’ve devised a few tips to help you stay out of debt if you continue using credit.

Tips for staying out of debt:

• Keep an eye on your spending habits: whether you shop online or in the high street stores, keep your spending within your budget and avoid taking out credit lines for unnecessary purchases.
• Seek out expert advice: if you continue to have financial worries after clearing your debt, consider looking for specialist advice before you borrow money again.
• Open a savings account: if you’ve gotten into the habit of putting money aside for debt, you can continue to put money aside into a savings account to help with necessary expenses.
• Minimum payment: if you decide to keep and use a credit card, remember to make at least the minimum payment each month and pay back the balance in full to avoid extra interest.
• Consider changing banking providers: finding a new credit card with better interest rates, or changing up your banking provider who rewards you for banking with them is a great way to manage your finances. 

Once you’ve implemented one of the seven strategies, you’ll soon be on your way to excellent credit ratings and no longer have to worry about debt. You're all set to eliminate your debt and enjoy life better, knowing your financial health is on the mend. 

Are you looking for other tools to cater to your financial needs? Look no further. At Compare Banks, we show you all that Britain’s banks have to offer in one place. We help you find and compare banks with the help of independent reviews, guides, and news. 

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• Best Credit Cards for Bad Credit UK
• How To Pay Off Credit Card Debt