Step 1: Stop borrowing
No matter how hard it feels, borrowing more elongates and expands the problem - it doesn't fix it. Do a budget, look at where you can save money, and if needed cut back. If it simply is impossible to live without borrowing more - then you're experiencing serious problems and it's worth considering getting one on one help (see Step 5).
Step 2: Cut your interest rates
The less interest you pay, the more your repayments go towards clearing the actual debt, not just servicing it. With credit cards, one of the main methods to cut costs is to do a balance transfer. This is when you get a new card that pays off the debts on old cards for you, so you owe the new card the money, but hopefully at a cheaper interest rate, provided you've a good credit score.
Yet while credit card rates have improved, so now enormous 30 months 0% is possible, it's come at a price. Less people are accepted, and the only way to truly find out if you'll be accepted is by applying for the card, and that leaves a mark on your credit file. However a new range of tools have become available that can indicate which cards you're most likely to be able to get. See Martin's balance transfer guide for full best buys and eligibility checker.
When picking a balance transfer card, it's best to go for the one with the lowest fee within the 0% time you're certain you can clear the card. Here are my best buys:
- Longest 0% deal: Barclaycard has the longest deal at 30 months 0% with a one off fee of 2.89% (18.9% representative APR after).
- Lower fee 0% deals: Lloyds Bank is 24 months 0% for a 1.5% fee (17.9% representative APR after). Fluid, meanwhile has a card, which offers 12 months 0% for a 0.75% fee (18.9% representative APR after) - you can't access it from the Fluid homepage, so you need to go via this special link.
- Rate for Life: If you think you need a long time to repay debts, or aren't sure, then a life-of-balance card while not cheaper is safer. The lowest rate is the MBNA Rate for Life credit card at 6.9% on all debt shifted in the first 60 days, which lasts until the debt shifted is repaid in full.
If you're thinking of getting a 0% balance transfer card, remember my golden rules:
- Repay at least the set monthly min, or you may lose the 0% rate.
- Aim to clear the debt or shift again before the 0% ends, or rates rocket.
- Don't spend on these cards, it isn't usually at the cheap rate and if you're trying to clear debt, new borrowing doesn't help.
Step 3: Check existing customer offers
New credit isn't always necessary to cut credit card costs. Many credit card providers give existing customers special rates for cutting interest as long as they make regular payments and haven't filled their credit limit on that card. The best thing you can do is phone your provider and ask: "I've got debts on other cards. If I shift them to you, will you give me a special rate?" Many will - Barclaycard especially. Use this in conjunction with new balance transfer deals.
Step 4: Pay off the highest rate debts first
Always pay as much off as you can, that way less interest racks up and you're debt free quicker.
Yet if you've multiple cards, don't just split the amount you repay on various debts - far too many people follow this costly tactic.
List all your debts in order of the interest rate, then focus all your spare cash at clearing the debt with the highest interest rate first, for the simple reason that it costs you the most. This means you should make just the minimum repayments on all other lower interest rate debts. Once the most expensive is repaid, shift focus to the next highest rate card and continue until debt free. You'll be debt free far more quickly.
Step 5: If in crisis see a non-profit debt counselling agency
There are a few ways I'd define debt crisis:
- Your non-mortgage debts are more than a year's after tax income.
- You can't meet even your minimum repayments or basic outgoings.
- You're not sleeping at night due to your debts.
If any of these apply, rather than trying to keep going eking out month by month, it's far better to see a non-profit debt counselling agency for one-on-one help. The techniques they use will take you out of the credit market (not a bad thing for some, but that's why I say it's mainly for those in crisis).
This isn't something to panic about, but it is something to act on soon. Yet let me say something, no matter how black it feels I've NOT ONCE seen an unsolvable debt case. It mightn't be easy or quick, but it can be done.
The places I'd suggest are Citizens Advice, StepChange Debt Charity (formerly the Consumer Credit Counselling Service), or National Debtline.
They'll work through your debts with you to devise a solution. Their most common tool is a debt management plan where they negotiate with your creditors to make a set monthly payment. For more severe debts, options include debt relief orders, IVAs or bankruptcy, but never try these without advice first. And don't worry they're there to help, not judge.