How to manage debt effectively?

Managing debt can feel overwhelming, but with a structured approach, you can regain control of your finances. This blog will guide you through key steps such as assessing your debt, creating a realistic budget, and selecting the right repayment strategy, including the debt snowball and avalanche methods. We’ll also explore the benefits of debt consolidation, negotiating lower interest rates, and building an emergency fund.

Assess your debt situation

Begin by taking an honest look at your current debt. Make a list that includes:

  • Types of debt (credit cards, loans, etc.)
  • Total balances owed
  • Interest rates
  • Minimum monthly payments

·       This will give you an overview and help you prioritise your repayment plan.

Create a realistic budget

A budget helps you allocate your income to cover expenses and debt repayment. We recommend to follow these steps:

  • Track your spending for a month to understand your spending habits
  • Categorise expenses (essential vs. non-essential)
  • Identify areas where you can spend less to free up money for debt repayment
  • Set a monthly debt repayment goal to reduce your total balances steadily

Choose how you plan to repay your debts

Select a repayment strategy that suits your situation. Here are 2 methods on how to do so:

  • Debt snowball method

Focus on paying off the smallest debt first while making minimum payments on the others. Once the smallest debt is cleared, move to the next smallest. This approach can provide quick wins and boost motivation.

  • Debt avalanche method

Prioritise paying off debt with the highest interest rate first to minimise the total interest paid over time.

Advantages of debt snowball method

  • Quick wins by paying off smaller debts first
  • Boosts motivation with each debt cleared
  • Simple and easy to follow
  • Reduces the number of debts over time
  • Provides a clear, structured repayment plan
  • Helps build confidence in managing debt

Disadvantages of debt snowball method 

  • Can result in paying more interest over time
  • May delay tackling larger, high-interest debts
  • Doesn’t maximise interest savings compared to other methods
  • Can feel slow if larger debts take longer to pay off
  • Might not be effective for those with substantial high-interest debt
  • Could mean neglecting secured debts, such as a mortgage or car loan, which could lead to more severe consequences, such as losing your home or vehicle

Advantages of debt avalanche method

  • Saves money on interest by prioritising high-interest debts
  • Reduces overall debt faster in the long run
  • More cost-effective than the debt snowball method
  • Helps pay off larger debts more quickly
  • Provides a logical, financially efficient repayment strategy

Disadvantages of debt avalanche method

  • Can be less motivating due to slower progress on smaller debts
  • Requires more discipline and patience
  • May feel overwhelming if large debts take time to clear
  • Harder to follow for those seeking quick wins
  • Might not provide immediate sense of accomplishment

Consolidate your debt

Consider combining multiple debts into one loan for easier management and potentially lower interest rates. Consolidating debt into a single loan can lead to lower interest rates by replacing high-interest debts, such as credit cards, with a loan that typically offers a lower rate. This can reduce overall interest payments, making debt more manageable and potentially saving money in the long run.

Negotiate lower interest rates

Contact your creditors to see if they can lower your interest rates. A reduced rate can decrease your monthly payment and total interest paid over time.

Avoid getting more debt

While repaying your existing debt, avoid taking on new balances:

  • Stick to your budget and only use credit cards for essential expenses
  • Switch to cash or debit for non-essential spending to limit new debt

Build an emergency fund

An emergency fund can prevent you from relying on credit cards for unexpected expenses. Aim for:

  • Three to six months’ worth of living expenses saved in an easily accessible account
  • Small, regular contributions to gradually build the fund over time

Monitor your progress regularly

Review your budget and debt repayment plan every month:

  • Adjust your strategy as necessary based on your progress and any changes in your financial situation
  • Celebrate milestones to stay motivated as you pay down each debt

Seek professional help if needed

If your debt feels unmanageable, support is available. Visit our Payment Difficulties page for a list of organisations that can help, including:

  • Non-profit credit counselling agencies for personalised advice and debt management plans e.g. StepChange and Debt Advice Foundation
  • Financial advisers for assistance with budgeting and long-term financial planning

Stay consistent and be patient

Managing debt is a long-term commitment. Stay disciplined, adjust your plan as your life changes, and be patient with your progress.

Summary

To effectively manage debt, start by assessing your total debt and prioritising repayments. Create a budget to allocate income wisely and consider repayment strategies like the debt snowball or avalanche methods. Debt consolidation and negotiating lower interest rates can help simplify payments.

Avoid new debt, build an emergency fund, and monitor your progress regularly. Seek professional help if needed, and remain consistent and patient as you work towards financial freedom.

At Central Trust, we know that life can be unpredictable, and managing debt can be challenging. That's why we're here to help you secure the loan you need, even if you've faced rejection from traditional high street lenders. Our team is dedicated to finding solutions for individuals who need financial assistance. Speak to one of our knowledgeable advisors today by calling our free number located at the top right of your screen. Let us help you take control of your finances with the personalised support and understanding you deserve.

If you are thinking of consolidating existing borrowing you should be aware that if you are extending the term of the debt you may be increasing the total amount you repay. All loans are subject to status, and appropriate lending terms.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.