If you’re looking to get out of debt, you’re unlikely to be alone. Average UK household debt currently stands at £15,400.
Although debt can cause stress and worry, by following a few simple steps it is possible to reduce the amount of money you owe and improve your financial situation.
Here’s how you can become debt-free, with the process of doing so potentially being easier than you realise.
Gather information on your debt
While it may sound rather obvious to list all of your debts and the interest that is paid each month, doing so can help to make it easier to put together a plan of action aimed at reducing them.
A simple way of gathering the required information is to get hold of the latest monthly statements from your credit cards, mortgage, car repayments, personal loans and any other debt that you currently have.
Once you have this, it could be a good idea to list each individual debt and its interest rate. This will give you an accurate starting point from which to begin clearing your debt in the most logical and efficient way possible.
Cut your interest rates
All debts are made up of two parts: capital repayment and interest. While repayments for the amount you have borrowed cannot be reduced unless you make payments to the lender, interest rates can be cut in order to speed up the process of reducing your overall debt level.
One way of doing this is to obtain a balance transfer credit card to repay existing credit card debt. A money transfer credit card may also be of interest in repaying personal loans, since it is paid into a bank account rather than to an existing credit card.
It is possible to obtain 0% interest rate periods of over two years on balance transfer and money transfer cards at the time of writing. This could mean that money currently being used to pay interest on existing debt could instead be used to repay balances.
Although balance transfer and money transfer credit cards can charge a transfer fee, in many cases this is less than the amount of interest that is saved during the 0% interest rate period.
It’s worth pointing out that the interest-free period on balance transfer and money transfer credit cards is variable depending on the provider and the credit worthiness of the applicant. Also, interest will be charged once the interest-free period ends.
Price comparison sites (such as MyWalletHero!) provide information on the most appealing balance transfer credit cards and money transfer credit cards. Once you have found the best one for your personal circumstances, information such as your address history and financial situation will be required when applying for it through the issuer’s website.
Alternatively, you may wish to consider a personal loan. This could be attractive if it offers a rate of interest that is lower than the rates being paid on existing debt. As with a credit card, an application for a personal loan can be made online. Details such as your monthly income and expenditure are likely to be required, so it is a good idea to have them to hand before starting the application process.
Overpay your debt
Even after reducing the interest rates you pay on your debt, it makes sense to overpay wherever possible when making repayments. Doing so will help to clear your debts at a faster pace and will reduce the total amount of interest you pay in the long run.
It is logical to repay debts with the highest interest rates first, since this will help to cut your overall payments by the largest amount. Therefore, you may wish to initially target your overpayments on the debts that have the highest rates of interest.
Even modest overpayments can lead to a significant reduction in interest payments – and in the time it takes to repay debt. For example, a £2,000 debt at an interest rate of 18.9% with monthly repayments of £100 would normally take 24 months to repay at a total interest cost of £417. Overpaying by £25 per month would save £97 in interest payments and clear the debt five months earlier.
By organising your debt, reducing the interest rates you pay on it and overpaying wherever possible, you can get out of debt at a faster pace. Doing so could put you in a stronger financial position and lead to less stress as you gradually reduce your total level of borrowing.
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