How to clear debt - a guide

Soaring inflation and the current cost of living crisis means an increasing number of people are falling into debt. While some amount of debt is usually unavoidable, if your debt is spiralling out of control then it’s time to take action. On this page, we include some handy tips to help you clear debt and get back into the black. You’ll also learn about other debt solutions, such as debt management plans, and discover where to get help if you need it.

Most people have some form of debt, for example, a mortgage or a car loan. However, it’s important to know how to recognise if your debt is becoming a problem so you can take action and prevent it from spiralling out of control. Ask yourself the following questions: 

• Are you constantly overdrawn? If you find yourself dipping into your overdraft every month, it could be a warning sign that you’re in a debt spiral
• Are you regularly spending more than you earn? Again, this could be a signal that you’re on a downward spiral that could snowball into a bigger problem if it’s not addressed  
• Is your credit card bill getting bigger each month? Credit card debt can easily get out of hand, especially if you can only afford to pay the minimum monthly amount
• Do you regularly worry about debt? If you’re constantly thinking about your finances or your debt worries are keeping you up at night, it’s time to take action 
• Are you struggling to cover your basic outgoings? If you’re finding it hard to pay essential bills such as your mortgage/rent or energy bills, you could be in a debt crisis
• Do you earn less than the amount you owe? If your annual income (after tax) is lower than your debt (excluding your mortgage), it could be a sign that things are spiralling out of control.

If you’ve answered ‘yes’ to some or all of the questions above, it’s time to take action. Although facing up to your debts can seem daunting, don’t ignore the situation as it will only get worse. As we explain below, there are lots of things you can do to help clear your debts, as well as free and impartial advice to guide you through what can be a challenging time.

If you want to clear your debts as quickly as possible, the following tips can help.

Create a budget plan

Creating a budget plan is a good first step to take, as it allows you to track your monthly expenditure accurately. Understanding where your money is going every month can help you narrow down which expenses are essential and which can be eliminated. By eliminating any expenses that aren’t a necessity, you could free up cash that can go towards paying off your debts.

Be sure to review your budget regularly to check whether your spending is within your set limits. A budget planner doesn’t have to be complex and you can even use our free budget planner to guide you. There are also various apps available to help you track spending and manage your budget.

Reduce your outgoings

Once you’ve made a budget plan, you can then identify where you can cut back. Luxuries such as TV subscriptions and gym memberships might need to be put on hold while you focus on clearing your debt. You can also look at ways to make savings on your weekly shopping, for example, by switching to supermarket own-label brands or buying less meat. And don’t forget to shop around to see if you can get a better deal on expenses such as your phone and broadband.

Pay off high-interest debt first

If you want to clear debt quickly, it usually makes sense to pay off the most expensive debt first. In the majority of cases, the most expensive debt is that with the highest interest rate, and settling this type of debt first can provide more financial and emotional relief.

Switch your credit card debt to 0% interest

If you’re struggling to pay off expensive credit and store card debt, consider opening a 0% balance transfer card. These cards effectively pay off your old expensive debt so you’ll owe money on the new card instead, but at a much lower – often 0% – interest rate. A balance transfer card will typically have a 0% rate for a set period, for example, 28 months, during which time you’ll pay no interest (although you may have to pay a small fee). 

Depending on how much you owe and the previous interest rate, this strategy could potentially save you thousands of pounds in the long run. It can also help you to clear your debts faster as more of your money will go to paying off the actual debt rather than the interest.

Pay more than the minimum balance

To positively impact your debt, it’s a good idea to pay more than the minimum payment requirements. If you’re able to do so, paying more off each month could mean that you clear your debts faster, and you’ll pay less interest overall. 

For example, let’s say you owe £2,000 on a credit card with an APR of 20% and you only pay the minimum balance of 2.5% every month. In this case, it will take you nearly 35 years to pay off your balance and you’ll have paid a staggering £5,000 in interest overall. However, if you were to pay, say, £100 every month, you’ll have cleared the debt within two years and your overall interest payments will amount to £530.

Pay in cash rather than on a credit card

It’s easy to incur debt by spending on your credit card, particularly when the cost of living crisis is putting further pressure on household budgets. According to the Bank of England, credit card borrowing in June 2022 rose at its fastest annual rate for more than 17 years. 

If possible, use cash and remove your credit card from your purse or wallet so you’re not tempted to spend. If you can stop using your credit card, you may also find it easier to pay off existing credit card debt.

Find ways to boost your income

Increasing your income means you’ll have more spare cash to put towards paying off your debt. Even if a pay rise isn’t on the horizon, there are plenty of other ways you might be able to boost your income:

• Check you’re claiming all the state benefits you’re entitled to – you never know, you might be missing out on valuable payments. The Gov.uk website contains some handy calculators to help you work out which benefits (if any) you’re entitled to
• Check your tax code – the wrong tax code can make a big difference to your monthly take-home pay
• Sell unwanted items – another way to boost your income is to sell unwanted items around your home. It might not seem much, but every little bit of extra cash can make a big difference when you’re trying to clear debt
• Reclaim rebates and charges – if you were mis-sold a payday loan or you’ve paid bank charges for going over your limit, check whether you can reclaim any money. Likewise, if you had to work from home during the pandemic, you might be able to claim a tax rebate to help cover your increased costs. Visit the Gov.uk microservice website for more information
• Rent a room in your home – under the government Rent a Room Scheme, you can earn up to £7,500 a year tax-free from letting out a room in your home 
• Start a side hustle – do you have a hobby or talent that you could monetise to bring in some extra cash? Websites such as Fiverr and peopleperhour have become popular with people looking to offer their services online, while platforms like Etsy are great for anyone wishing to sell crafts or handmade items.

Talk to your creditors

If you’re worried about missing a payment, speak to your creditor. Let them know you’re experiencing financial difficulties so you can work together to find a solution that works for you both. They have a responsibility to support you by offering a range of affordable options to help you pay off what you owe.

Generally speaking, it’s a good idea to use your savings to clear your debt. That’s because your debt is likely to be accruing more interest than you would be earning on your savings. See the example below:

£2,000 debt on a credit card with an APR of 17% = £340

£2,000 savings in a savings account earning 1.5% interest = £30

In this case, if you use your savings to pay off your debt, you’ll be £310 a year better off.

However, there are two main exceptions to this rule:

• If you’ll receive a penalty for withdrawing your savings because they’re locked in for a fixed term, it might be worth holding on before using the money to clear your debt. Of course, this depends on various factors such as the size of the penalty and how much debt you’re in.
• If your debt has an exceptionally low interest rate that’s below the rate you’d earn on your savings, it might make sense to keep the debt and let your savings grow. However, this approach will only work if you’re financially disciplined. 

Visit our guide, ‘Pay off debt or save?’, for more information and advice. 

If it does make financial sense to continue saving, it pays to find a savings account with a competitive interest rate. Raisin UK offers a range of savings accounts with high street-beating interest rates and extra savings boosts to help you make the most of your money. Plus with easy access savings accounts, notice accounts and fixed rate bonds to choose from, you’re sure to find an option that works for you and your savings goals.

If you’re struggling to pay off your debt, you might want to apply for a government respite scheme known as Breathing Space. Introduced in 2021, the scheme provides temporary protection from your creditors for up to 60 days while you seek debt advice and find an appropriate debt solution. 

There are two types of Breathing Space:

• Standard Breathing Space – your creditors won’t be able to collect and enforce your debts during your Breathing Space time. They’ll also have to freeze interest and charges on any eligible debts for 60 days
• Mental Health Crisis Breathing Space – this scheme offers extra protection to those who are undergoing treatment for a mental health crisis.

To be eligible for the Standard Breathing Space you must:

• Live in England or Wales
• Be unable to repay some or all of your debts ‘as they fall due’
• Not be in a Debt Relief Order, Individual Voluntary Arrangement or be an undischarged bankrupt
• Not have had breathing space in the last 12 months

You’ll need to apply for Standard Breathing Space through an approved debt adviser.

For many people, the strategies above will be enough to help them gradually clear their debt over time. However, if your situation is particularly challenging and these self-help methods aren’t working, you might need to consider a more advanced debt solution, such as one of those outlined below. 

Debt Management Plan 

A debt management plan is an agreement between you and your creditors to pay off all of your debts. Usually, debt management plans are used when you can only afford to pay a small amount each month, or when you’re experiencing problems but will be able to make repayments within a few months. You can either arrange to do this yourself or through a licensed debt management company on your behalf. 

It’s important to be aware of any fees and not enter into an agreement before you know the details. While it might be more time-consuming, it’s often more cost-effective for you to make arrangements directly with your creditors rather than going through a management company.

Individual Voluntary Arrangement (IVA)

An IVA (or Protected Trust Deed in Scotland) is an agreement you reach with your creditors to pay part of or all of your debts. This requires you to make regular payments to an insolvency practitioner who will then divide this money between your creditors. The IVA will start so long as the creditors holding 75% of your debts agree to it. Once approved, it will apply to all your creditors, including any who disagreed.

Administration Order 

An administration order may be the best option if you have a county court or High Court judgement against you that you can’t afford to pay. If you meet the eligibility requirements, you can make a monthly repayment to the court who will divide it between your creditors. The debt must be less than £5,000. To apply for an Administration Order, you’ll need to complete form N92 and return it to your local court.

If you don’t have enough money or sufficient assets that you can sell to clear your debts, you may have to apply for a Debt Relief Order or a Bankruptcy Order. However, these can have serious, long-lasting consequences and should only be used as a last resort.

Debt Relief Order (DRO)

A DRO is another way to help you clear debt if you owe less than £30,000, don’t own your own home and don’t have much spare income. A Debt Relief Order stipulates that creditors cannot recover their money without the court’s permission, and incurs a fee of £90. 

You may be discharged from your debts after 12 months if you are still unable to pay. You’ll need to apply for a DRO through an authorised debt adviser.

Bankruptcy Order

If you still can’t clear your debts after exhausting the previous methods, a bankruptcy order may be your only option. To pursue this process, you’ll need to make an application which will be considered by an adjudicator from the Insolvency Service. They’ll ultimately decide if you should be declared bankrupt. During a 12-month period of bankruptcy, any non-essential assets may be used to pay your creditors. 

Most debts are written off at the end of this period, however, it’s important to be aware that declaring bankruptcy has a serious, long-term effect on your credit rating. You may also have to sell your home or other assets. Bankruptcy will remain on your credit file for six years from the date the court makes you bankrupt. During this time, it will be extremely difficult to get credit. This could make it hard to run a business, get a mortgage or even open a current account.

Dealing with debt can be a worrying and stressful experience, but it’s important to remember that support is available. If you’re struggling to pay off your debt, there are several charities that can provide free and impartial advice: 

• StepChange – telephone 0808 808 4000
• National Debtline – telephone 0800 138 1111
• Citizens Advice – telephone 03444 111 444 (option 3)

And if your financial troubles are affecting your mental and physical health, both Mind and the NHS websites contain useful information and advice to help.