How to Understand and Tackle Your Debt Step by Step
Debt can feel like a dark cloud hanging over you, slowly growing bigger until it’s all you can think about. Unless you have fallen into the trap of ignoring it all. But here's the good news: You can take control of your debt, and it doesn’t require secret knowledge or magic—just a solid plan and a bit of patience.
If you’re struggling with debt, don’t worry, you’re not alone. Whether it’s credit cards, loans, overdrafts or missed payments that have crept up on you, understanding where you stand is the first step toward gaining control and making a plan to tackle it. Here’s a step-by-step guide to help you understand your debt, and importantly, how to start tackling it.
Step 1: Take Stock of What You Owe
Before you can deal with your debt, you need to know exactly what you're dealing with. It’s tempting to bury your head in the sand (trust me, we’ve all been there), but getting a clear picture is crucial.
How to do this:
List your debts: Write down all your debts—credit cards, personal loans, student loans, payday loans, overdrafts, car finance, pay as you go plans —anything you owe money on.
Include interest rates: For each debt, list the interest rate. You’ll see pretty quickly which ones are costing you the most in interest.
Total up the amounts: Add up the balances of each debt to get your total debt figure.
At this point, you might be feeling a bit overwhelmed. Don’t panic—it’s just a starting point. Knowing where you stand is empowering, and it’s the first step toward putting together a plan.
Step 2: Prioritise Your Debts
Not all debts are created equal. Some might have high interest rates (like credit cards), while others may be lower-interest (like student loans). The key is to focus on the debts that are costing you the most.
How to do this:
Focus on high-interest debt first: This is typically credit card debt. It’s expensive, and paying it off first means you’ll pay less interest in the long run.
Look at your minimum payments: While it's important to tackle high-interest debts first, make sure you’re paying the minimum on other debts so you don’t miss any payments and hurt your credit score.
Consider other factors: Sometimes, the emotional toll of a particular debt is significant (think: an old loan from a friend or family member). Paying off these debts first can give you peace of mind.
Step 3: Create a Debt Repayment Plan
Now that you’ve got an idea of your total debt and which ones to tackle first, it’s time to put a plan in place. The most common methods for repaying debt are the debt snowball and debt avalanche methods.
Debt Snowball Method:
This involves paying off your smallest debt first. Once it’s paid off, you move to the next smallest. It’s all about building momentum and feeling that quick win.
Debt Avalanche Method:
This approach focuses on paying off the debt with the highest interest rate first. You may not get the same quick wins as with the snowball method, but you'll save more money in the long run.
How to do this:
Choose the method that feels right for you—there’s no one-size-fits-all approach. The snowball method might feel more motivating, while the avalanche method could save you more money.
Set a monthly repayment target that’s realistic based on your budget.
If you can, consider transferring high-interest credit card debt to a 0% balance transfer card for a set period (this can give you a breather from interest).
Step 4: Cut Back and Free Up Cash
Now that you have a repayment plan, it’s time to focus on freeing up extra cash to put towards your debt. While it might not be fun to tighten the purse strings, every extra pound you can put towards your debt will help.
How to do this:
Review your spending: Go through your bank statements and look for areas where you can cut back. Do you need that daily takeaway coffee, or could you opt for a packed lunch?
Stop adding to your debt: Put a hold on any new purchases or unnecessary spending while you’re focusing on paying off debt.
Find additional income: Look for ways to earn extra cash—whether it's a side gig, selling unused items, or even renting out a room in your home.
Step 5: Stay On Track and Keep Adjusting
The road to debt freedom can feel long, but consistency is key. Celebrate your small wins, like paying off a credit card balance or hitting a savings goal. These little milestones will keep you motivated.
But it’s also important to stay flexible. Life changes, and your financial situation might shift. Regularly check your budget, adjust your repayment plan if needed, and if you get a windfall (like a bonus or tax refund), use that extra money to pay off debt faster.
Step 6: Consider Professional Help (If Necessary)
If you’re feeling totally stuck and overwhelmed, there’s no shame in reaching out for professional help. UK-based debt charities like StepChange or National Debtline offer free advice and can help you negotiate with creditors if needed. In some cases, debt management plans or even debt relief orders (DROs) could be an option.
Conclusion: Take Control, One Step at a Time
The most important thing to remember is that tackling debt is a marathon, not a sprint. Understanding your debt and having a solid plan is empowering. By staying consistent, making adjustments as necessary, and seeking support if needed, you can regain control of your finances and work towards a debt-free future.
You’ve got this—take it one step at a time.
