How to pay off your debts in 6 simple steps

Becoming debt-free is a common financial goal, but it can feel like an overwhelming task to start. So how do you actually do it? In this guide we’ll go over some simple strategies you can follow to help you get out of debt. And we give you some tips that can help you speed up the process. 

1. Understand your debt

To begin, it’s important to have a good understanding of your debts. Although it might be tough to look at what you owe, doing so will help you create a repayment plan that works for you. 

Make a list

Start by listing all your debts, including any credit card, store card, loan, overdraft, by now pay later (BNPL) and mortgage debts. Next, gather the following details for each debt:

• total amount owed
• the interest rate
• your payment date
• minimum payment amount 

This is the first step on your way to becoming debt-free. 

How to find out my debts?

If you’re not sure about your debts, start by looking at your credit file. It’s like a record of your financial behaviour and it contains information about your borrowing. In the UK, there are three main credit reference agencies to check with:  

•    Experian 
•    Equifax 
•    TransUnion

It’s a good idea to check your credit file with all three, as they might have slightly different information. Check your credit files for free through Credit Karma (TransUnion), ClearScore (Equifax) and Experian (this option does not have full details about your debts).

But remember, you may not be able to see some of your debts on your credit file. Debts to utility companies (like electricity or gas providers) and some older debts from more than six years ago might not be visible. So you may need to check old statements, letters, or contact your lenders and utility providers directly. 

2. Which debts do I need to pay first?

Priority debts

Some debts are what’s known as priority debts. They’re called this because if you don’t pay them, they can cause serious problems, no matter how much you owe. 

Priority debts can include:

•    Rent, mortgage or any loans secured against your home 
•    Council tax payments 
•    Gas and electricity bills 
•    Child maintenance payments 
•    Income tax, National Insurance and VAT payments 
•    TV licence 

If you don’t pay these debts, there can be big consequences. For example, you could lose your home, become bankrupt, be taken to court or even end up in prison. So, it’s important to pay these debts off before your non-priority debts, like credit cards, unsecured loans and overdrafts. 

Minimum payments

Make sure you know the minimum payments for each debt. That's the smallest amount of money you must pay towards your debt each month. It’s set by the lender, such as your credit card company or loan provider and you can usually find it written in your contract.

Always make sure you’re paying at least the minimum payment on each debt – remember to pay priority debts first. Not making minimum payments could cause issues like a drop in your credit score.  If you don’t think you’ll be able to make your minimum payment, contact your lender and explain your situation. 

Paying the minimum often means you’ll end up paying more in interest over time and can mean you stay in debt for longer. So it may be worth paying more than the minimum when you can. 

3. Cut the cost of debts

You could try to get a lower interest rate on your current debts to make them cheaper. There are some special products that might be able to help you reduce the cost of debt, such as:

0% balance transfer card

If you’re paying off credit card debt and are currently paying interest, you could try to transfer it to be interest-free for a set period, using a balance transfer card. 

Transferring your balance to a new interest-free card could save you money but look out for any fees. And keep in mind that the interest-free period is usually for a limited time only, so aim to pay off the debt within this period. 

Applying for a new balance transfer card can cause a temporary dip in your credit score. But if having a lower interest rate helps you manage and make payments towards your debt, you may find your score improves over time. 

Debt consolidation loans

Another option could be to consolidate your debts with a personal loan.

Here’s how it works:

• Get a new personal loan and use it to pay off your other debts.
• Then, make one payment to the new lender each month. 

Consolidating could save you money if the total cost of borrowing is lower. Make sure that the payments towards the new loan will be lower than what you’re currently paying towards your debts and watch out for companies that charge fees.

Check for any fees for clearing your current debts early and consider how long you’ll be making payments towards the new loan. Before taking on more debt, make sure that the repayments will be manageable.

Pay off your debts

Now that you have a clear understanding of your debts and have tried to cut costs, let’s look at different methods for paying them off:

4. Use your savings

If you have some money saved up, think about using it to pay down your most expensive debts. This can be a smart idea because the interest you’re charged on debts is often higher than what you earn from savings. 

For example: 

•  £5000 loan debt at 20% costs £1000 in interest over a year
•  £5000 saved in a savings account at 5% earns £250 in interest over a year

So, by using the savings to pay off the debt, in this example you’d end up £750 better off each year.

Remember to do the maths for your own situation. If your debt has a very low interest rate, it may be better to keep saving instead. And try to keep some money aside for emergencies if you can. See our guide on savings goals for help. 

5. Choose the best way to pay off debt

Finding the best way to pay off your debt doesn’t need to be hard. Let’s look at two common strategies: 

Snowball method

To use the snowball debt-repayment method, you focus on paying off your smallest debt first while making only the minimum payments on your other debts.

Here’s how to do it: 

1. Make a list of your debts (excluding mortgages) and put them in order from smallest to largest balances
2. Pay minimum payments on all debts - except the smallest one. Pay more than the minimum for this debt, and put any extra money you can towards paying it
3. When the smallest debt is gone, put the money you were paying towards it onto the next smallest debt
4. Repeat until you’ve cleared all your debts

With each debt you pay off, you’ll have more money for tackling the next one, just like a snowball getting bigger and bigger as it rolls downhill. 

Avalanche method

With the avalanche debt-repayment method, you pay off your debts in order of interest rates, tackling the debt with the highest interest rate first. 

Here’s how to do it: 

1. Make a list of your debts (except mortgages) and put them in order of highest to lowest interest rate
2. Pay the minimum payments on all debts - except the one with the highest interest rate. Focus on paying this debt off first and put any extra money you can towards it 
3. Once you’ve paid off the debt with the highest interest rate, shift your focus to the next-highest interest rate debt, and continue until you reach the debt with the lowest interest rate 
4. Repeat until you’ve cleared all your debts 

6. Talk to a debt advisor

If you’re struggling with debt, you could try to get debt advice. You can contact these organisations for help:  

• StepChange: They give free debt advice and can help you find a way out of debt.
• Citizen’s Advice: They can give you free advice and help you find a way forward, whatever the problem.

A debt advisor may explain various formal agreements known as debt solutions, which are other options for tackling your debts:

• Debt relief orders (DROs)
• Debt management plans (DMPs)
• Individual voluntary arrangements (IVAs)
• Bankruptcy

Each debt solution has its own criteria and effects that a debt advisor can explain to you in detail.