S1E9: How to get out of debt and stay out, plus Damo reveals he could’ve gone bankrupt
Getting into debt can lead to a vicious cycle and massive problems - just ask Damo. He nearly went bankrupt in his 20s and in this episode he tells T for the first time how bad it got. It’s vital to sort out problem debts before you can start doing wealth-building things like investing, so we explain when you’re most likely to get into debt and what to do to get out of it. You are not alone.
Key things to think about from this episode
1 in 4 people in the UK are in danger of falling into financial difficulties - a single shock like their car breaking down will result in them falling behind on bills or credit payments.
Damo got into a lot of debt in his 20s and then had to work his socks off to get out of it.
Some of the most common reasons for falling into debt are relationship issues like bad break-ups. Or perhaps someone in the marriage has the financial knowledge, so after they divorce, the other person really struggles. Damo also found it was mostly women who were in charge of household budgets.
Lots of people don’t talk about money in relationships, and this can make debt issues worse. Try to speak to your partner.
Reckless spending can also lead to dangerous debt of course but it’s not as common as you might think.
Try not to see the companies you owe money to as your enemy. If you work with them it can really help. Because they want their money back, they should do their best to support you - perhaps by giving you a payment holiday to give you some breathing space.
Ignoring the companies you owe often means they go after you harder because they think they’re going to lose their money.
Debt collectors can’t force their way into your home but a court appointed bailiff can.
Credit card companies can put the highest interest rate debts like cash withdrawals at the back of the queue, which means it’s only when you’ve paid off the lower interest rate debt that they let you tackle the debt costing you the most.
An overdraft is only good the first time you use it, when you get that extra money. From then on you’re just in a debt hole.
A mark on your credit rating like a default notice or bankruptcy lasts 6 years.
The ‘minimum payment’ should be called something more like ‘interest only’ because that’s basically what it is. The vast majority of what you’re paying is interest - only a tiny amount of the minimum goes towards clearing the balance.
There’s no magic hack for getting out of debt. You need to hammer them one at a time (highest interest rate first - please see more below).
Key things to do after this episode (if you have problems with debt)
Try to seek help early. People tend to wait till the wolves are at the door and that’s often too late.
Seek free advice - we strongly recommend that. Please check out StepChange.
You should deal with priority debts first, the ones that can land you in prison or affect your living situation like council tax, rent, bills etc.
It’s always worth calling the organisation you owe money to e.g. the council, to say you’re struggling. This is so they can help, perhaps by setting up a payment plan.
After you’ve cleared your priority debts, write up all your remaining debts, the amounts you owe, and most importantly the annual interest rates. This is so you can compare the costs of each.
You should pay the minimum required on each debt except you should overpay on the highest interest rate debt and hammer that one till it's gone. Then you move onto the next highest interest rate debt, and so on.
Logic dictates you should tackle the highest interest debt first because it’s costing you the most. Typically the order will be credit cards, then loans, then overdrafts but you need to see the numbers.
Some people prefer paying the smallest amount they owe first (not the debt with the biggest interest rate) so they can get a win under their belt quickly. This might help psychologically but it doesn’t make the most sense financially. This is of course your call though.
Play around with What’s The Cost to see how overpayments can change your life. The site is pretty slow and old school but it helps.
Although there’s no magic wand, something that can of course help is increasing your earnings. Damo did Chinese takeaway deliveries, for instance.
Depending on your situation you might be able to consolidate your debts into one debt at a lower interest rate - it comes down to your position and the numbers of course.
Check out our budget episode - a good budget is a key tool for navigating your way out of debt.
