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10 steps to a debt-free life

Hannah Ricci,

Mortgage repayments, soaring utility and fuel prices and the rising cost of the weekly food shop are hitting households across the country. And it’s not just low-income families feeling the pinch. Transact, a network of more than a thousand debt and financial inclusion organisations, reported an increase in calls from middle-class households feeling the pain of price increases as far back as 2010.

"We are seeing a new type of client. Teachers, police and banking and service sector workers, many of them homeowners, are struggling with mortgages, secured loans, and credit card debts," says Heather Keats, director of one of Transact’s members, Community Money Advice.

Whether you’ve just got a couple of niggling loans or the amount you owe is keeping you awake at night, commit to ditching your debts and quit borrowing for good. Here is Moneywise's 10-step get-out-of-debt plan, to help you to turn your finances around.

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1. How much do you owe?

If you want to become debt-free, the first - and arguably most important - step is to work out exactly how much you owe and how much the debt is costing you. Simply write a list with the amount owed, type of credit, lender and the rate of interest charged for each debt. This can be done by digging out all your paperwork and contacting all your creditors to get up-to-date balances.

Alternatively, you can get a copy of your credit record from one of the credit reference agencies, such as Experian, Equifax or Callcredit.

Facing up to your debts can be a daunting experience - especially if the figure is bigger than you expected - however it’s absolutely crucial if you want to become debt-free.

2. Speak up

It may sound like a cliché but, if your total debt has brought you out in a cold sweat or your repayments are starting to worry you, sharing will help. Many people feel ashamed to talk about their money worries, but the sooner you face up to it then the sooner you can start on the path to becoming debt-free.

"Debt can be incredibly stressful so it is important to tell someone," says John Fairhurst, managing director of Payplan, a free debt advice organisation. It’s not uncommon to hide debts from our partners: research from Engage Mutual found that 22% of Brits who live with their partner have a financial secret, with credit card spending topping the poll as the number one lie between couples.

If you’re committed to sorting out your problems, try to be honest with your partner. "But if you can’t share your problem with a friend or family member, speak to a debt counsellor. Above all, don’t panic," Fairhurst adds.

3. Work out your expenditure

Now that you’re psyched up for the challenge ahead and know exactly what you are up against, you need to start thinking about a personal debt repayment plan. However, in order to work out how much you can realistically afford to pay each month, you need to know exactly how much money you have coming in and going out.

This means writing a budget. Easy access to credit has made budgeting something of a lost skill, but it’s not difficult. Sit down with your bank statements from the past few months and jot down your monthly income.

Next, make a note of all your outgoings, separated into three categories: regular commitments, such as mortgage or rent payments, council tax, and loan or credit card repayments; day-to-day expenses such as food, travel, entertainment, clothes and toiletries; and finally occasional expenses, such as car repairs, holidays and birthday presents.

The second and third categories tend to fluctuate from month to month, so work out an average over a six-month period.

Accounting for ad hoc cash machine withdrawals in your statements can be tricky and this is where a spending diary can help. For the next month, commit to recording every penny you spend. You can download a free app to your mobile phone and it allows you to type in and record your spending. free apps like iXpenseIt Lite for the iPhone or Toshl Finance for Android let you enter your spending on the move. If you’re not tech-savvy, a notebook and pen will do the trick.

If, during this process, you discover that paying off unsecured debts like credit cards and loans are taking up more than 25% of your monthly income, it’s worth getting free advice from a debt charity.

4. Review your expenses

Now you have a clearer idea of exactly where your money is going it’s easier to identify areas where you can cut back to free up more income. It’s easy to make substantial savings without making any changes to your lifestyle and this can be done by reviewing how much you pay for regular expenses like your phone and broadband deals, and utility bills.

For gas and electricity, work out your annual spend and visit a switching site to see how much you could save. Try the same for your home phone and broadband - but beware of penalties for cancelling your current contracts before they end. If your mobile phone contract is up for renewal soon, negotiate with your provider for a cheaper deal.

Insurance is a very competitive market so you are likely to find big savings by shopping around for your home and motor cover.

5. Review your spending

Once regular expenses have been trimmed, turn your attention to day-to-day spending. Just how extreme you need to be will depend on how much money you need to free up.

The list in step three will show how much you can afford to spend after fixed expenses have been accounted for, and the spending diary will highlight your weak spots for overspending, such as nipping to the shops after work or giving in to takeaways.

Overcoming these temptations may require a more dramatic shift in your attitudes towards money. Try to work in cash and withdraw a set amount of money for the week ahead. You’ll be able to see exactly how much you can spend and it will encourage you to identify purchases in terms of what you want and what you actually need. For example, at £5 a day you could spend £25 a week on takeaway coffees and sandwiches, or this could go towards a necessity such as the weekly grocery shop.

Budgeting doesn’t have to strip all the joy out of life, but it does require a new way of thinking about money and a degree of compromise. It doesn’t come naturally for everyone so it could take a couple of months to get into the swing of it.

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6. Review your debts

Debt can be exacerbated by high interest rates causing it to grow faster than you can repay it. Rearranging your debts to lower-cost loans and credit cards will reduce the size of repayments and help to clear them faster. This is not the same as borrowing more to repay debts - a dangerous approach that should be avoided.

Refinancing your debts can shave hundreds of pounds off the cost. A £2,000 debt on a credit card charging 20% APR for example, will increase the debt by a staggering £400 a year. Switching the debt to a card that charges 0% on balance transfers will cut the interest and give you some breathing space.

Unfortunately, the credit crunch has made refinancing debts harder than it used to be. Lenders have tightened their criteria, making credit more difficult and expensive to secure, particularly 0% deals. It all comes down to your personal credit record, which is what lenders look at when deciding whether to grant you credit and what interest rate to charge.

Credit records list the credit you have, in addition to any late or missed payments, and each lender assesses this information against its own criteria to give you a credit score. This means what is considered a poor credit record by one lender, could be deemed acceptable by another. Multiple credit applications over a short period of time can, however, worsen your score.

A useful tool is the ‘smart search’ facility at, which works with credit agency Equifax. It asks a few questions to estimate your credit score and shows you the loan and credit card deals for which you are most likely to qualify.

Two terms to be wary of when trying to reduce your borrowing are secured loans and debt consolidation loans, which are often heavily advertised during daytime TV. Secured loans are often easier to obtain than unsecured loans for homeowners because your property is used as collateral, but for this very reason they should be a last resort. Many consolidation loans are also secured. These loans can be very high risk because rates tend to be variable, and you could lose the roof from over your head if you struggle with repayments.

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7. Prioritise your debts

Now your debts are as cheap as possible and you’ve started to trim back your spending, focus on clearing your debts. The most effective method is to clear the most expensive debts first, so start with those charging the highest rates of interest, such as store cards, which can charge an eye-watering 29% APR.

If you’ve missed a payment or anticipate doing so, contact the provider to explain the situation. Contacting the companies you owe money to may be the last thing you want to do but it is a useful step to turning things around. "Despite what you might think, many companies are sympathetic to people who cannot afford repayments," explains Fairhurst. "Recovering debt can be expensive so they are often willing to work out an arrangement, particularly if you demonstrate your commitment to resolving the situation."

Going forward, ensure repayments are made by arranging a direct debit on payday each month. For credit cards, a direct debit should, at the very least, cover the minimum monthly repayment, but try to boost the amount you pay from the savings made in steps three and four.

Again, if you’re struggling to work out your own debt repayment plan, debt charities can help.

8. Use your savings

Squirreling money away in savings when there are debts to repay can be a hindrance to becoming debt-free. While it is important to build up an emergency savings fund to cover unforeseen expenses, particularly if you have children, debts tend to cost more than savings earn, making it a false economy.

Savings can make us feel safe, but repaying debt should take priority if it is costing you more. The sooner you become debt-free, the sooner you can genuinely start saving so consider using existing funds or any lump sums, such as a work bonus. But before paying off big chunks or clearing loans in full, find out if there is a penalty charge for doing so.

9. Change your spending habits

Remaining debt-free requires a shift in your entire attitude towards money and spending. The experience of debt is often enough to transform how you approach money. The key is to get back to basics and learn to live within your means. Some say the silver lining of the credit squeeze is that the reduced availability of credit will force us to manage our income more carefully, rather than simply borrowing if the funds aren’t available.

Saving up for expensive purchases was a way of life for previous generations but it has become an alien concept for many people today. It is a very useful habit we should all cultivate to avoid taking on more debt.

When it comes to large purchases there are often easy savings to be made by using shopbots like and which scour the net for the best prices.

10. Start saving

Once your debts are repaid, it’s important to start saving so that you become less reliant on credit and won’t need to borrow the next time a big expense looms.

Clearing your debts will free up money each month that can be redirected to a savings account and used for expenses such as unforeseen costs, holidays and Christmas.

As a guide, it is advisable to build up an easy access cash fund equal to about six months’ salary, before considering other options, such as equity investments.

An individual savings account should be the first option, as you can save up to £5,640 each year before being liable for tax. Top rates currently hover around the 2.5% mark, and are available online, over the phone or in a branch. Factors to look out for when choosing an account are minimum initial deposits and minimum monthly deposits, the notice term, and whether a bonus rate is applied.

After using your annual ISA allowance, go for other easy access accounts, or regular savings accounts that require a set payment each month.

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