How to get out of debt

If your finances are in a mess, now is the time to take control. Read our ten-step guide to getting back into the black.
Step one: Work it out
Sit down and work out how exactly how much you owe and who you owe it to. Be honest or you'll only store up more problems for the future. If your debt repayments take more than 20% of your net monthly income you are entering a danger zone and must take steps to cut back.

Step two: Budget
Once you know how much you owe you can draw up a budget, including a schedule for repaying your debts. Be realistic and work out what you can afford to repay and still stay within your budget.

Step three: Be disciplined
Don't borrow any more money or take on any more debts until you have repaid what you already owe.

Step four: Watch your daily spending
Take a set amount of money out of the bank at the beginning of the week and give your card to a friend or family for self-keeping. That way you cannot spend more than you have in cash.

Step five: Organise your bills
Make sure you are paying all your utility bills by direct debit. It's much easier to manage as you won't have to worry about sending cheques on time and it is also cheaper as most providers offer discounts for direct debit payments.
This is probably the easiest way to cut your bills. You can do it today simply by calling your bank with the details of your energy suppliers. Or, alternatively most energy bills enclose a form to fill in to set up a direct debit.

Step six: Switch your utility suppliers
You could save hundreds of pounds each year on your gas, electricity, water and phone bills by switching. It is advisable to switch your energy and phone suppliers before you set up direct debits or you will end up having to change them again.

Step seven: Switch to a cheaper credit card/loan
Try different providers and you'll probably be able to find a credit card or loan with a better rate than you're paying now - particularly for transferred balances on cards (watch out for balance transfer fees). But remember that these special offer rates will rise considerably after an initial interest-free period - make a note in your diary to change deals again. It's best to go for a low rate that looks stable rather than 0% for a limited period, unless you're happy to switch again in six months.

Step eight: Cut up store cards
Store cards charge by far the highest rates for credit, so if you're finding it hard to manage these debts throw away your cards now to avoid temptation.
You'll pay well over the odds for most store cards - it's better to pay cash if you can. For those items you can't pay cash for, shop around for the best deals - the market is competitive, so there are some excellent interest free credit offers around. It is also worth taking a look on the internet as many products are offered there more cheaply.

Step nine: Sort out your bank account
If you're a customer of one of the big four - Barclays, HSBC, Lloyds and NatWest - then you're probably not getting the best deal on your overdraft or interest rates.
The rise in the number of internet banks means there is far more choice, so it makes sense to switch and take advantage of offers such as fee-free banking and lower overdraft rates. You could save yourself a lot of money just by switching to a new current account.

Step ten: Switch your mortgage
The mortgage is probably your biggest expense each month, so it's important to ensure you have the best possible deal. Speak to an independent financial adviser or a broker about your remortgaging options and if it looks like you could save money make the switch.
Remember to take into account any transfer charges from your current provider and any legal fees for switching. Weigh up the all-in cost of remortgaging before you decide if it's worthwhile, you may still find that the savings you'll make with a new mortgage will more than cover any transfer expenses.

And one for luck: Review protection policies
Finally, save money by switching your insurance company. You can often get cheaper car cover or mortgage protection, for example, by phoning around or looking through an online broker. It is also worth checking that you're not doubling up with some of your cover - for example, some home contents insurance policies cover your belongings while you are on holiday, so you wouldn't need this in your travel insurance.


source: thisismoney.co.uk