5 steps to becoming debt free

With high levels of unemployment and rising living costs, many families across the UK are struggling with mounting debt burdens. However, if you too are finding it hard to manage financially, then it is important to do your best to reduce the amount you owe as quickly as possible. The MoneySupermarket five-step plan to debt freedom can help you do just that.

By Clare Francis

Consolidate your debts

If you have a lot of unsecured debt, the total amount is likely to be split over a variety of credit cards, overdrafts and loans - some of which will probably be charging you high interest rates.

Consolidating your debts using a low-rate loan or a 0% balance transfer credit card can therefore be a good way to get a better idea of where you are, as well as slashing the interest you are paying.

Every week, Clare Francis, financial journalist and editor of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal.
Pay as little interest as possible

When looking at consolidating your debts, it is vital to find a source of credit that costs you as little as possible.

You can, for example, pay 0% for 22 months on balances transferred to the Barclaycard Platinum credit card with extended balance transfer.

Remember though that this offer is subject to a balance transfer fee of 2.9% of the debt being moved to the card, which has a representative APR of 17.9% (variable).

If you think you can pay your debts off within nine months, the Virgin low fee balance transfer credit card, which offers nine months at 0% with a fee of just 1.5% and a representative APR of 16.8%, could therefore prove a cheaper option.

Meanwhile, if you are in any doubt about being disciplined enough to avoid further spending on a 0% card, it may also be more sensible to consolidate your debts with a low-rate loan.

Marks & Spencer Money, for example, is currently offering £10,000 over five years at a representative APR of 6.0%.
Set yourself a budget

One of the problems with being in debt is that, once you have made the necessary repayments, it can be hard to make it to the end of the month without having to take on further credit. But borrowing more will only exacerbate the situation in the longer term.

Once you have consolidated your debts and are paying as little interest as possible, you should therefore work out a household budget that includes all your bills as well as spending on food, transport and other essentials.

Doing this should also help you to see where you can make some changes to ensure that your outgoings do not exceed your income.
Contact your bank

If you are really struggling to meet your debt repayments, then the first thing you should do is to contact your bank or lender to discuss the situation.

All lenders appreciate being kept in the loop. And together, you may be able to find a solution such as a short-term payment holiday or reduced payments over a longer term.

This is likely to prove more difficult if you bury your head in the sand and miss a number of payments, though.
Seek independent advice

Charities such as the Consumer Credit Counselling Service (CCCS) and Money Advice Trust are there to help people with severe debt problems.

Solutions that they could suggest range from debt management plans, under which you agree to make affordable repayments to your creditors each month, to Individual Voluntary Arrangements (IVAs) with which you pay back a percentage of your debts, and even bankruptcy.

You must ensure that you understand the implications of these debt solutions, though. Bankruptcy, for example, could involve losing your home.

Every week, Clare Francis, financial journalist and editor of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal.
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