Tips on how to pay off or reduce debt faster

Most people have some form of debt in the UK - whether a mortgage or short-term debt such as an overdraft or credit cards.

At the end of December 2020, the average total debt per household was £60,860, according to The Money Charity’s latest money statistics. Having debt may be common, but it can be a problem if it becomes unmanageable or is causing you to worry.

Perkbox found money to be the biggest cause of stress in its UK financial wellbeing survey. And that’s why it’s important to tackle debt problems to help improve both your financial and mental health.

Mortgages (also known as secured debt) are typically the most common and largest debt many consumers carry. If you’re struggling with paying off this type of debt, visit StepChange for more information. The tips in this guide will offer key takeaways for managing all types of debt but will focus on unsecured debt (such as credit cards or loans).

In this guide, we’ll cover some great ways on how to pay off debt including:

1. Get organised: understand your finances
2. Assess the severity of your debt
3. Prioritise your debt
4. Use the avalanche method
5. Use the snowball method
6. Consolidate your debt
7. Create a budget and tweak spending habits
8. Make overpayments to reduce interest
9. Avoid getting into more debt (and especially avoid payday loans)

The first step to reducing your debt is gaining a better understanding of your financial situation. Although this can be daunting, getting organised is crucial for managing your finances and planning how to clear debt.

A good place to start is finding out your credit score. You can apply for a free credit report from a credit reference company such as Experian or TransUnion or a financial marketplace like Clearscore who use data from Equifax to provide you with your credit score. A credit report will show your short- and long-term debts.

Alternatively, you can make a list of everything you owe. Write down all your debts, interest rates, and monthly payments to fully understand your financial situation. By using this method, you can account for loans that you may have borrowed from a friend or family member for example (and therefore would not be recorded on your credit file).

There is a difference between ‘problem debt’ and ‘managed or manageable debt’. Listing all your debts (as mentioned above) and considering repayments alongside your income and other outgoings can help you assess the severity of your situation.

To put it simply, if you can make your loan repayments comfortably within your budget, you are likely have manageable debt. But if you can’t, it’s what’s known as ‘problem debt’.

Problem debt

If you’re struggling to keep up with regular payments or beginning to lose track of the different debts you have, you are likely to have problem debt.

If you have problems making repayments, specialist help is available to offer you personalised support about how to reduce debt. For information on the resources available, visit this guide’s last section on what to do if your debt problems are more serious.

Managed debt

Many people in the UK have what’s known as managed debt; this is debt that you can comfortably repay.

If you understand the repayments involved for every debt you have and know that you can repay all of these on time, you have managed debt.

In this guide, we’re going to look at some of the best ways to pay off debt and how to prevent managed debt from becoming problem debt.

Once you have a list of your debts and have fully assessed your situation, it is time to make a plan.

If you have one large debt, reducing your debt can be more straightforward. If possible, you can choose to make overpayments to pay off the debt faster. However, you need to bear in mind that overpayments may  incur additional charges, which we’ll cover in more detail later.

If you have multiple debt accounts, the solution can be a little more complicated but is still achievable.

Paying off multiple debts can be made easier with debt consolidation. If having one debt sounds less overwhelming, then debt consolidation might be an option you want to consider. This method allows you to merge your debts into one repayment plan and can even reduce the overall amount owed (depending on the rate and term of the loan). Once again, this is something we’ll revisit later.

Debt consolidation is not the only solution, however. In fact, for many, it may be difficult to find a debt consolidation loan that is suitable - those with high interest rates or a long loan term could increase the amount you owe. So, here are some other approaches for how to clear debt fast:

Avalanche method

The avalanche method, also known as debt stacking, involves paying off the debt with the highest interest rate first.

To use the avalanche method effectively, you must make the minimum payment on all of your accounts first. After that, you put as much extra money as possible towards paying off the account with the highest interest rate. Once you have paid this debt in full, you move on to overpaying on the debt with the next highest interest rate - continuing the process until you have paid all your debts.

This technique is called an avalanche method because it can take a while before you see anything happen. But, once you get into this, your debts should  suddenly start falling away - just like snow in an avalanche.

Snowball method

Another approach is the snowball method. This involves paying off your debts in order of smallest to the largest. Although this method may involve paying more interest long term, it is popular because it comes with psychological wins, which can be beneficial for motivation.

To use the snowball method, you must make the minimum payment on all your accounts first. You then put as much extra money as you can towards paying off the account with the smallest balance. And once you’ve paid that one off in full, you move on to the next smallest debt.

This is called the snowball method because the amount you are paying off starts small but gradually grows.

Both the avalanche and snowball methods involve making overpayments. If you’re unsure on any  fees associated with an overpayment, speak to your lender. To find out more about how this works and the things to keep in mind, scroll down to our overpayment section.

As we mentioned earlier, debt consolidation can help some people to pay back their loans in a more manageable way.

There are two main forms of debt consolidation - credit card consolidation and debt consolidation loans.

When consolidating credit card debt, you can use a balance transfer to move multiple cards’ debts onto one account. If your new card has a lower interest rate, this can reduce the total amount you’ll pay back over time too.

You also may be able to merge some or all of your existing debts into one with a debt consolidation loan. As these only have one regular repayment, they can make budgeting easier.

Just like balance transfers, debt consolidation loans could save you money in the long-term if you’re able to get a lower interest rate than your existing debt. However, consolidating your debt may not always be the best option. You’ll need to consider the rate and the term (length) of the new loan as you could end up paying more in the long run. A number of factors can affect the rate you’re offered. For example, if you have a poor credit score, you may be offered a high interest rate which can increase the amount you’ll need to pay back. If you choose this option, you should try and ensure you do not build up more debt as this could put you in a worse position than before.  

The below steps can improve your credit rating over time by helping you take better control of your debt.

If you’re committed to paying off your debt, you’ll need to understand the importance of creating a budget. This will give you a clear idea of where your cash is going and help you recognise the unnecessary spending habits you can cut down on (whether that’s takeaway coffees or buying luxury items).

Having a well thought out budget - and sticking to it - can help you save money. And the money that you can save will play a significant role in reducing your debt much faster.

Although you will likely need to cut some things out of your regular spending routine, we recommend starting by making small changes. Setting attainable goals and sticking to them is better than making unrealistic goals that can lead you to give up entirely. It’s a good idea to gradually introduce changes into your budget so that you have time to adjust and this, in turn, will help keep you on track.

We know that budgeting can be tough. If you’re looking for more help, visit our tips on how to stick to a budget when trying to save money.

Budgeting can help pay off your debt earlier than expected by giving you the funds to make overpayments on loans.

If you plan to make overpayments, always check if the debt in question has any additional charges associated with making overpayments or paying early. If you settle your loan in full early for example, an early settlement  fee may be charged.  These are fees a lender may charge  if  you pay off a loan before the end of the contractual term.  The cost of the fee (if charged) depends on the loan agreement with your lender. You should read the terms of your agreement carefully to understand any fees associated with early settlement or speak to your lender. Early settlement fees are typical with loans as the money is lent based on you paying back over a certain period with a set interest rate.

Making overpayments during the term of your loan agreement will generally mean the amount of interest you pay back over the term of the loan is reduced as your loan term or contractual payments will be reduced accordingly.  Alternatively, if you choose to settle your agreement in full this is likely to be beneficial if the amount of interest you save is greater than any early payment fees.  You should always notify your lender in advance of your intention of either making a partial early settlement or full early settlement. 

Here’s an example to show how overpaying your loan can help you pay it off quicker:

• Outstanding balance: £8000
• Interest rate: 15.4%
• Remaining term: 3 years, 2 months
• Monthly repayments: £267.34

Providing that there are no fees for early repayment, paying off an additional £100 per month (taking the payments to £367) will mean you will pay off your loan 12 months faster. Reducing this loan term by a year is possible by budgeting just £25 per week.

You can work out how quickly you can repay your loan with overpayments by using TheMoneyCalculator.com’s Loan Overpayment Calculator. This calculator will not account for any early repayment charges, so only use this as an indication.

For more information on this, visit our guide on making early repayments.

One of the most important things to do when trying to get out of debt is to avoid accumulating any more of it.

It can be easy to buy products on finance, such as a new television, but you should be cautious. Monthly repayments of reasonably small amounts can be tempting, but every new debt you take on - no matter how small - will make it harder to become debt free. Little amounts can add up, so focus on paying off your existing debt before borrowing more.

If you need a loan (perhaps to fund an emergency), be careful when choosing a lender. Payday loan companies can have extremely high APRs. Payday loans are a costly option, and taking one out can see your debt continue to grow.

Consider the steps we’ve already discussed and investigate if there is another way you can find additional funds before taking out a payday or other high interest loan. For example, do you have any goods you can sell? Or could you get a low interest debt consolidation loan that pays off your existing debts and gives you the extra you need?

If you find yourself in financial difficulty, talk to your lender about your situation. There might be a solution they can offer to help. There are also many charities that can offer advice and support, including organisations like Step Change and National Debt Line.

If you feel your debt is unmanageable, you should look to speak to an experienced debt adviser. You can take many different avenues to get your debt into a more manageable place, and debt advisers will guide you through and suggest the best options for you and your situation.

Debt advisers will never judge you and are always happy to talk through both big and small problems. Their advice is available for free, and they can help you with how to pay off debt and become debt free.

There are many places that will support you with free, confidential debt advisers, including Stepchange and National Debtline.