How to Get Out of Debt in the UK

Getting out of debt can be overwhelming at first, but with the right techniques, anyone can do it. Read more to learn how to get out of debt in the UK.
How to Get Out of Debt in the UK

Being in debt and the process of getting out of it can be difficult and overwhelming. If you’re facing debt and you’re not sure what to do, understand that you’re not alone: in 2021, nearly 60% of Brits had debt, with an average of roughly £25,000 per person.

Getting out of debt isn’t always easy and can take a bit of time; however, it is possible to overcome it by taking the right actions and developing proper financial habits. In this guide, we will provide a comprehensive overview of getting out of debt, including common methods of paying off debt, habits that can prevent you from accumulating more debt, and more.

By the end of this guide, you’ll have a foundational understanding of how to get out of debt, and the confidence and knowledge to get started on your own journey. So without further delay, let’s get right into it!

Stop Taking on New Debt

If you find yourself stuck in a hole, the first rule is to stop digging. Thus, the first step for getting out of debt is identifying what caused you to tip into debt in the first place. Some people may have debt due to increasingly high living costs, while others may have accumulated high amounts of debt from credit card spending. 

Identifying where your debt comes from and stopping it builds the foundation that will allow you to get out of your existing debt. 

Work Out What You Owe

Once you’ve stopped taking on more debt, it’s time to work out exactly how much you owe. Working out what you owe is an essential part of getting out of debt, as it will allow you to create the best plan for your situation. A good financial plan is also referred to as a budget.

Before you start the budgeting process, keep in mind that it can be an overwhelming experience. This is one of the things in life that it may seem easier to run from, but facing it is the only way to bring a fix. It’s important to know that you may find that your total debts are larger than you anticipated, and that number alone can seem like an impassable barrier. Remind yourself that you’re taking positive steps to get out of debt, but remember that it won’t happen overnight. Be kind to yourself and keep your focus on the end goal to not to let yourself get discouraged early on.

What’s the Best Way to Pay Off Debt?

It could take over 25 years to get out of debt if you are making just the minimum monthly payments on a credit card with an average interest rate. However, by maintaining a higher monthly payment, the same card can be paid off in about 5 years. To get out of debt quickly, it’s best to accelerate the repayment process.

There are two main accelerated debt repayment methods for getting out of debt: the avalanche and the snowball methods. Each method has its advantages and disadvantages, so let’s take a closer look at both.

The Avalanche Method

The avalanche method is the best way to get out of debt quickly. When you use the avalanche method, you focus on making the minimum payment on all debts, and then devoting whatever leftover funds you have to the debt with the highest interest rate.

By doing this, you’ll reduce the amount of interest you accrue, stopping your debts with high interest rates from costing you more and more over time. 

However, the avalanche method isn’t perfect, and it won’t work for everyone. Some of the flaws with the avalanche method include:

  • It only works if you have a steady income: Success with the avalanche method depends on being able to make consistent payments, so if your take-home pay varies, the avalanche method may not be as effective as it could be.
  • Discipline is essential: To succeed when using the avalanche method, a significant amount of your disposable income is going to be put toward repayments. This often means forgoing things you might otherwise spend that money on, like entertainment or travel.
  • Unexpected expenses can undermine the strategy: If your car breaks down while you’re following the avalanche method, necessary payments for repair can throw off your payment schedule. Having an established emergency fund is important if you choose to pursue the avalanche method.

Despite these potential pitfalls or challenges, the avalanche method can be an incredibly effective way to get out of debt—and to do it fast.

The Snowball Method

The snowball method for getting out of debt takes the reverse approach to the avalanche method. With the snowball method, you again make the minimum payment on all debts, and then focus any additional funds on the smallest debt regardless of the interest rate, working your way up to the largest debt. 

The debt snowball method isn’t perfect either. Here are some things to keep in mind as you consider it:

  • You’ll accrue more interest: Because you’re focused on paying off debts according to size, rather than interest rates, you’ll accrue more interest over time.
  • The process is slower: More interest means that getting out of debt with the snowball method will take longer than the avalanche method.

The snowball method is widely seen as the easiest way to get out of debt, and despite its flaws, many people find that it helps them build the habits needed to tackle their debt. While the avalanche method works well given consistent, large payments, the snowball method is much more attainable for anyone.

With the avalanche method, it may take some time before you start to really make a dent in the debt, whereas with the snowball method, you can see encouraging results in a short period of time. This helps people build the confidence and discipline to tackle increasingly larger debts.

Should You Use the Snowball Method or the Avalanche Method?

There’s no simple answer to this question as everybody’s circumstances will be different. However, here are some questions to ask yourself when choosing a debt repayment method:

  • Can you fully commit to the avalanche method? Targeting debts with the avalanche method is only effective if you follow through. If a debt has a high interest rate, only paying it halfway won’t give you the results you want.
  • How quickly do you want to get out of debt? If time is of the essence, the avalanche method will be your best bet. Keep in mind that it will still require a lot of commitment.
  • Do you need to see results right away? If you think you’ll get discouraged by the avalanche method, the snowball method can reassure you that you’re making progress.
  • Are you okay spending more in the long run? Because the avalanche method will reduce the total amount of interest your debt accumulates over time, it’s the most cost effective way to pay off your debts. However, those same debts will accumulate more interest over time if you opt for the snowball method.

In the end, both the avalanche and snowball methods are effective techniques to get out of debt; which one you choose to use comes down to finding the right fit for your own circumstances.

Getting out of debt often depends on much more than just these repayment plans; for many people in the UK, getting out of debt requires an overall shift in financial habits.

Getting Back to Budgeting Basics

As you embark on your debt repayment journey, it’s always helpful to reassess your current financial habits. Here are some of the most important things you can do as you start to get out of debt.

  • Make a budget: Account for your major monthly expenses like housing, mobile bills, utilities, groceries, and other essentials, and set up direct debits wherever possible to avoid unnecessary late fees. Keep in mind that it’s hard to get a budget right the first time, so revisit it and make adjustments that allow you to successfully make the payments that will get you out of debt.

  • Use your credit card wisely: Overspending on credit cards is one of the most common ways people rack up debt. However, by practising healthy credit card habits, you can avoid incurring more debt. Never spend more than you can afford, and generally try to treat your credit card like a bank card.

    Related Read: How to Use a Credit Card Wisely

  • Build an emergency fund: While being eager to get out of debt isn’t a bad thing, it’s important to be prepared for any snags along the way. Having an emergency fund with 3-6 months of living expenses can allow you to pursue accelerated debt repayment plans without worrying about breaking your payment cadence if an expense comes up unexpectedly.

Other Debt Repayment Strategies

The debt snowball and avalanche methods are great, but they rely heavily on having the income to make additional payments, and might not work for everyone’s financial circumstances. So, you might be thinking, ‘I can’t repay my debts—what options do I have?’

Fortunately, there are still options that can help you get out of debt. However, keep in mind that taking out additional lines of credit to pay off debt is more risky than accelerated debt repayment plans like the avalanche or snowball methods. Therefore, it’s important to have a concrete plan before fully committing to these alternatives. Let’s take a closer look at some of the most common alternative debt repayment strategies.

Balance Transfer Credit Cards

Some credit cards offer a 0% introductory annual percentage rate (APR), which typically lasts 6-21 months. These are often referred to as balance transfer credit cards. When you transfer an old balance to a balance transfer card, you’ll have a period during which your debt isn’t accumulating interest, giving you time to make significant payments on existing debt without it growing.

However, balance transfer credit cards also come with risks:

  • Transfer fees can be significant: A 3-5% transfer fee might seem small, but when it’s applied to a £2,000 balance—close to the average credit card debt in the UK—it can lead to an additional £100 coming out of your pocket.
  • Introductory periods encourage spending: When you’re trying to repay debt, the last thing you need is an invitation to spend more. However, that’s exactly what balance transfer cards can do.
  • Introductory periods don’t last forever: It’s essential to pay off as much of your debt on a balance transfer card as possible, because when the introductory period ends, the credit card company will start charging you regular interest, which can add up quickly, especially if you’ve added to your balance rather than cut it down.

Balance transfer credit cards can be a great tool for repaying debt when used wisely, but are risky otherwise. In fact, the main reason credit card companies even offer interest-free cards is because they’re confident the average user won’t pay off their balance by the end of the introductory period.

If you decide to use a balance transfer card, make sure that you have a concrete plan in place for reducing your debt before the introductory period ends.

Debt Consolidation Loans

Debt consolidation loans are a way of combining—or consolidating—your debts into one single payment. You take out a loan to repay all your debts at once, and then simply have the loan to pay back.

The main benefit of a debt consolidation loan is that your payments get simplified, which can make it less likely you miss any payments. This can boost your credit score by adding consistency to your payment history, while also lowering your credit utilisation ratio.

For a debt consolidation loan to be a viable path out of debt, you’ll need to find one with an APR lower than your current payments. When your debts are in one place with a lower APR, you accrue less interest, and can theoretically apply more to each payment than you would if various balances were rapidly accumulating interest.

Debt consolidation loans also have their share of risks along with the benefits:

  • Debt consolidation loans could cost you in the long run: If a debt consolidation loan has lengthy repayment terms, you could actually accrue more interest over time, even if the APR is lower than your previous payments.
  • They can create a false sense of security: Debt consolidation loans can simplify your payments and be much easier to manage than previous payments, but that doesn’t mean the work is done. To successfully escape debt using this method, you’ll need to change the financial habits that originally got you into debt.
  • A lower APR isn’t guaranteed: If you have a poor credit score, your interest rate could actually end up higher than your previous payments. Having an APR lower than your previous debt repayments is critical for getting the best results with a debt consolidation loan, so make sure your credit score is in good shape before applying for a debt consolidation loan.

Always do your research before taking on a new line of credit to get out of debt. If the best practices aren’t followed, tools like balance transfer credit cards and debt consolidation loans can leave you even deeper in debt. 

Debt Management Plans

Debt management plans are similar to credit consolidation loans, with the main difference being that you’re not actually taking out a new line of credit. Debt management plans are agreements brokered by charitable organisations between you and creditors, outlining how you will make payments going forward.

With debt management plans, you’ll often make your payment to the organisation that brokered the plan, which will then distribute the payments to creditors.

There is often a small cost associated with starting a debt management plan, but a huge advantage is that they are much more accessible, as a poor credit score won’t limit your ability to get a plan.

Debt Relief Counselling Services

While balance transfer credit cards, debt consolidation loans, and debt management plans are some of the most common and widely available alternatives to managing and getting out of debt, they still might not be the right fit for everyone.

Fortunately, in the UK there are a number of other debt solutions available through charities and the government, such as individual voluntary agreements (IVAs), debt relief orders (DROs), bankruptcy, and more.

FAQs About Getting Out of Debt in the UK

Getting out of debt is a complex process. Here, we answer some of the most common questions about getting out of debt in the UK.

How Long Does it Take to Get Out of Debt in the UK?

How long it takes you to get out of debt will depend on a number of factors. The largest factor impacting how long it will take you to get out of debt is typically the amount of debt you have.

The length of your repayment will also depend on things like your repayment method, how diligently you make additional payments, and whether or not you take on additional debt during the repayment process.

Will Buy Now, Pay Later Services Help Me Get Out of Debt?

Because some buy now, pay later (BNPL) services advertise no late fees or interest, you might think that using them more often can help you reduce your debt. Unfortunately this isn’t really the case; in fact, they might lead to even more debt. According to a report from Which?, 24% of consumers ended up spending more than they intended to when BNPL was available.

Additionally, when you use BNPL, your budget needs to account for even more payments, which can reduce the funds you can devote to your debts using the avalanche or snowball methods. 

Related Read: BNPL Meaning Explanation and Guide

Can You Save Money While Getting Out of Debt?

It’s completely possible to both contribute to savings and repay debts at the same time. Of course, if you are adding money to savings, you’re probably contributing less to your accelerated debt repayments, which can extend the amount of time it takes you to get out of debt.

You may want to contribute more to savings when you are first starting to pay off your debts in order to build an emergency fund, but in the end, whether or not you choose to add to savings while paying off debts comes down to personal preference and priorities.

Should You Repay Your Debts or Save?

Whether it is more beneficial to repay your debts or save will depend on your personal circumstances. In most instances, your money will be worth more when applied to debts rather than saving, as your interest rate on your debt will almost always be higher than the interest you earn on your savings. However, this primarily applies to consumer debts, such as credit card debt and personal loans, rather than mortgages or student loans. 

What If I Can’t Afford Additional Repayments?

Solutions such as debt consolidation loans can help make payments more affordable, although there are risks associated with that method of debt repayment.

The most straightforward way to get the money to make additional repayments is by increasing your income through a side hustle or gig work, such as delivery driving, selling products online, or tutoring. 

Additionally, you might consider debt relief counselling services, which can provide guidance for almost any debt circumstance.

Related read: The Best Self-Employed Jobs in the UK

The Pave App Can Help You Boost Your Credit Score

Getting out of debt is no easy task: it takes a lot of effort, planning, and above all, persistence. With that said, getting out of debt is completely possible. It all comes down to having an intimate understanding of your own financial circumstances, identifying the debt repayment strategies that will be most effective for you, and following through with a plan.

Unpaid debts and your total credit utilisation have a massive impact on your credit score, and an important part of getting out of debt is improving your credit score. We designed the Pave app to make that easier.

With bills monitoring to help you stay on top of your payments, active credit building, and personalised credit fixes, Pave is your go-to resource for building healthy credit as you get out of debt. To see why over 300,000 people across the UK have joined Pave, download Pave from the App Store or Google Play today.