Debt Repayment

Are you struggling to afford debt payments? Or just looking for a better way to handle your debt? Here is how to go about it.

Take stock of your situation ✍️

There are lots of possible ways to manage debt, depending on your exact situation.

To work out what approach makes the most sense for you and your finances, you first need to get a full and accurate understanding of:

  1. What your debts are, and
  2. What budget you have to work with.

It can be daunting to go through your post, email, apps and website logins to find all the information you need. But it is an essential part of taking control of your finances, and for working with creditors or debt advisers.

Make a list of your debts

For each debt, you will need to know the amount owed, the interest rate, and minimum payment. For example:

Amount owedInterest rateMinimum monthly payment
Catalogue card£34049.9%£15
Credit card£9800%
(until October)
Personal loan£2,60012%£200
Overdraft£1,500 max39.9%n/a
Make sure you list every debt, including credit cards, catalogue accounts, personal loans, car payments, overdrafts, arrears on bills, informal borrowing from friends and family, etc.

Double check you haven’t missed anything

Make a budget

Next, you need to work out how much you have available for debt repayment each month, after paying for bills and other necessities.

Here is our guide to making a budget, based on your current spending.

Think about any changes you could make to save money. These could be small, like reducing spending on particular categories, or much larger, like getting a cheaper car or moving in with family. Make a note of how much money you could potentially free up if you needed to.

If you have any savings, note those down as well. If you have any high interest debt, using your savings to pay it down is likely to be the most cost effective route.

Record your ‘statement of affairs’

This is optional, but the record will be very useful, whether for your own reference, to get informal help online, or to share with debt advisors like StepChange.

You can use one of these tools:

Calculate your debt payoff schedule

Now that you have accurate information on your debts and budget, you can use an online calculator to see how long it will take for you to pay off your debts, and how much it will cost.

You may want to run the numbers for different budgets to see the impact they have.

If you can’t afford your debt, get help from a debt charity 🆘

If you:

  • Can’t afford the minimum payments on your debts
  • Need to put expenses on your credit cards to get through the month
  • Think you can’t realistically pay back as much as you owe
  • Have priority debts such as council tax, mortgage or rent arrears
  • Or just aren’t sure about your situation

Then we really recommend getting some professional advice from StepChange, the UK’s largest debt charity.

Other excellent services include National Debtline, Citizen’s Advice, and Christians Against Poverty.

There are many potential routes for dealing with problem debt, from negotiating with creditors to different types of insolvency. It is really helpful to have someone knowledgeable walk you through the options, what they cost, and what impact they may have in the future.

⚠️ It’s extremely important that you get high quality, unbiased advice. There are predatory ‘debt advice services’ out there who are more interested in earning a commission from selling you a debt product (such as an IVA), rather than finding the solution that’s best for you.

These companies advertise on TV and social media. Stay away.

You can also learn more about debt solutions at:

If you can afford to pay off your debts, do it efficiently 📉

Having crunched the numbers, your debt may feel more manageable. Now you want to work on a plan to squash this debt as quickly and cheaply as possible.

Reduce interest rates whenever you can

If you are paying interest on your debt, the first thing to check is whether you can move it to a lower interest card or loan. Interest is really expensive, so if it’s possible to reduce the interest rate on your debt, that will help each debt repayment you make go much further.

Use an eligibility checker to see what cards and personal loans you may be accepted for. If you don’t see any good options, check back in a couple of months.

If you’re considering a consolidation loan, make sure you’re actually getting a better interest rate than you currently have. Loans can be deceiving, as they often quote nice, manageable monthly payments. But if the interest rate is higher, those low payments won’t be making a dent in the balance, and you’ll be making them for many years to come at a cost of potentially thousands!

Prioritise high-interest debt

You should always make the minimum payments on all of your debts. Beyond that, concentrate on the highest interest debt first.

This is sometimes described as the ‘debt avalanche’ method, and we recommend it because it will get you out of debt fastest and cheapest.

If a different debt feels more urgent psychologically (because it’s newer, smaller, was used to buy something you regret, etc) try to remind yourself that all money is the same. All your debts are interchangeable, regardless of how they were incurred. Try to adjust your mental priority order of debts to match how quickly they burn through your hard-earned cash.

Ultimately though, it’s your money and your decision. If you’ll sleep easier if you repay a family member who helped you out, or remove some smaller debt from your ledger, you certainly can.

Review your budget

Every bit of spending you can cut frees up more cash to throw at your debt and get you debt-free faster. But how drastically it makes sense to cut your budget (or work longer hours, or sell things you own) will depend on your individual circumstances. It’s always a balancing act with your quality of life.

For example, if by working overtime and pausing discretionary spending you could be debt free in a few months, you may well prefer to knuckle down and get it over with, compared to carrying your debt for a year and paying hundreds more in interest over that time.

In contrast, if you’re looking at a long term plan to pay down a lot of low-interest debt, you may prefer to take 5 years to pay your debts off at a sustainable rate, rather than 3 years of obsessive frugality.

Why interest is a killer 🚒

When you borrow at 0% interest, you can end up spending more than you earn, but you only need to pay back what you actually spent.

However with high interest rates like 15% or 20% (let alone 40%, 50% or 60%!) you can end up repaying significantly more than you ever spent on your original purchases. The higher the interest rate, and the longer you owe the money for, the more expensive it is.

As an example, every £1000 you borrow at 20% interest will cost £200 in interest per year that you hold that debt for. At 40% interest, you would pay £400 over the course of that year. This is a lot of money, especially if you used credit because you felt you ‘couldn’t afford’ the original £1000 spend!

The higher the interest rate on your debt, the more worthwhile it is to make drastic budget cuts to pay it back faster.

In our famous flowchart, we suggest that you pay off any debt at 10% APR or above before progressing to building up savings. That’s because with high interest debt, it is better to pay it off than to keep money in savings, even for an emergency.

Should I pay off low interest debt? 0️⃣

If your debt is at a lower interest rate, and the monthly minimum payments are affordable, it is less urgent to pay off. You can potentially keep a more relaxed spending budget, and work on building up your savings for emergencies and for future goals at the same time as paying off your debt.

How to balance repaying debt and accumulating savings will depend on the interest rates involved, and also your personal preferences and situation.

Mathematically, the highest interest rate wins, regardless of whether it’s on savings or debt. If you had an outstanding loan and a savings account offering the exact same interest rate, paying into either would give the same results – either more savings or less debt, in equal amounts. (This hypothetical example assumes no taxes or fees apply, and that the same amount of money is held in the accounts for the same amount of time).

In reality interest rates are generally not identical. It usually costs more to borrow than you would receive from savings, making debt repayment the most efficient option. However, the opposite can also happen occasionally.

If there is a significant difference in rates (2% or more), it’s worth going with whichever offers you the best rates.

If the difference in interest rates is minimal, we would generally still suggest paying off the debt rather than accumulating savings. This is because:

  • It reduces the temptation to spend your savings on something other than debt repayment. You’re more likely to use some of your savings for a holiday than go further into debt for one.
  • It makes your overall financial situation clearer. £3000 savings and no debt can feel very different to £8000 savings and £5000 debt, even though they add up to the same amount saved.
  • There is a risk that you will miss a repayment and incur fees and interest, which can turn an inexpensive debt into an expensive one.

If your debt is at 0%, keeping your debt going while holding savings at a higher rate is known as stoozing.

Should I pay off my student loan? 🎓

Our student loans page is dedicated to this question.

Should I pay off my mortgage? 🏠

See our mortgage overpayments page.

Should I stretch out a loan to improve my credit score? 💳

No, this is a myth. Owing money on a loan will not improve your credit worthiness to future lenders. To improve your credit history, you are better off having a credit card that you pay off in full every month – plus this won’t cost you interest! More about credit ratings here.

Useful Resources 🔗