HOW TO... Get Out of Debt

If you are finding it hard to meet repayments on your loans or credit cards, or if you are finding that your monthly outgoings exceed your income, and you need to borrow to pay the bills, you have a problem with debt.

Recognise problem debt

Your first task is to recognise the problem. There is no point avoiding it, and simply hoping it will go away - it won't. Throwing away your bank statements without opening them and ignoring letters from companies you owe money to will only get you further into trouble.

Problem debts? Check out Moneyextra's Debt Advice Centre

Assess your debt problem

So, having recognised that there is a problem, the next step is to find out just how bad your debt situation is. Again, hiding from the facts isn't going to help.

To make a start, you need to write down all your debts, so you can see how much you owe overall, to whom and over what period. You will be able to see which bills are urgent - those that keep the roof over your head are the most important - and which are less pressing. You also need to see which are the most expensive, so that once you have made sure your home is secure - you are not behind with the rent or the mortgage - you can tackle them first. Store card debt is usually the most expensive, followed by credit cards.

Next, you need to make another list of your monthly spending, to see how much you need each month to survive. This will include items such as the cost of rent, mortgage repayments, fuel bills, council tax, food, fares and so on.

Finally, add up your household income. If you are single, this will be just your own earnings after tax and national insurance have been taken off, but if you are a couple, pool both sets of earnings and deal with your problem together. If you have another wage-earning member of your family living with you who can contribute to the household expenses, so much the better.

When you have added up your income and deducted your necessary expenditure, you will have a sum left over that you can use to start to pay down your debts. If you find that you have little or nothing left over to deal with your debts then you need to make some economies.

Painless saving

Move your debt to a cheaper lender

Investigate whether you can move any of your debt. For instance, if you have credit card debt racking up at a high rate of interest, your first move should be to stop spending on the offending card. You are only increasing the debt.

There are many good credit card deals out there. Investigate whether you can move your existing debt on to another card charging a lower rate of interest or, better still, 0% interest, using a balance-transfer deal. You will most likely have to pay a fee to transfer the debt to the new card - usually up to around 3% of the amount outstanding for 0% deals - but if you secure a 0% credit card deal you need only make the minimum repayment each month and you will incur no further interest until the new offer rate ends.

Can you save money by switching to another credit card? Find out with Moneyextra's comparison service.

Naturally this does not mean you should ONLY pay the minimum each month. The idea is that you get respite from the galloping interest accruing in order to increase your capital repayments and start making serious inroads into the amount you owe. You should make every effort to do this, or you will simply find that you have debt problems once again after a few months, once the new 0% or cheap credit card deal ends. Paying only the minimum each month is a sure route to escalating debt.

04 February 2008 © Moneyextra.com

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