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Your debt detox plan for the New Year

  • The New Year debt hangover will inflict serious pain in 2018 – as around a third of Brits face up to the fact that they borrowed to pay for at least some of their Christmas spending.
  • The level of unsecured borrowing (on things like credit cards, loans and overdrafts) is up almost 10% in a year – rising more than four times faster than wages. It has topped £200 billion – including almost £70 billion on credit cards.
  • If you are facing a debt hangover, you need a debt detox plan for the New Year

Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown:

“Christmas isn’t just a time for sharing and giving, it’s also a time for panicking, overspending and borrowing. Even before the full cost of Christmas hit us, unsecured consumer lending rose 9.6% in the 12 months to October, and the average borrowed was about £8,000. Meanwhile, a number of surveys just before Christmas found that around a third of us would be borrowing to pay for the festivities this year.”

“It means millions of people will come round to a horrendous debt hangover this New Year. Every pound you pay in interest on this debt is a pound taken out of your pocket. So to avoid charges and fees setting you back for the rest of 2018 and beyond, it’s important to implement a New Year debt detox plan.”

New Year Debt Detox

1. Start with your overdraft

This can be the most expensive way to borrow of all – costing a small fortune in charges and fees. In some cases it can even be more expensive than a payday loan. Psychologically, we get lulled into a false sense of security, because on pay day it feels like we’re back on top of our borrowing. Unfortunately, during the month, debts build back up again, and we end up facing more charges.

It’s far cheaper to crystalise this borrowing through something like a money transfer credit card with a 0% introductory period. Fees for transferring the initial amount start at around 2%, but this is a drop in the ocean compared to the potential cost of an overdraft.

2. Make sure you’re paying as little interest as possible on all your debts

If you have a payday loan, overdraft, store card, or the average credit card, then you’re likely to be paying too much for your borrowing, and the interest charges are making it harder for you to tackle your debts.

If you are borrowing on a card, switch to the cheapest possible deal. You can get balance transfer cards without a fee, which offer 0% interest for up to two years. If you know you will take longer to pay off the debt, you can pay a fee in return for a longer interest-free period. If your credit record means you don’t qualify for these cards, there are a few that offer fee-free periods of between 6 months and 18 months for those with less robust credit records – although again they will charge a transfer fee.

If you know you will take longer than two or three years to pay off your debts, you can consider taking out a personal loan.

3. Draw up a budget

Once you have covered damage-control, you need to work on solving the problem. By the far the best way to start this process is by drawing up a budget of everything you have coming in each month, and everything you spend. It can help to look at old bills, bank statements, or even keep a spending diary for a week or two to see where the money is going. You can put the details into one of the many budget tools online, including our household budget planner. This will tell you where you stand.

4. Cut your costs

The next step is to focus on cutting your costs in order to free up cash to pay off your debts. Start with the easy things - like spending less on gas and electricity, mobile phone and media packages. Moving from the average variable rate on utility bills to the cheapest, for example, can save you more than £25 a month.

Another satisfying approach is the direct debit spring clean, where you cancel things like gym memberships or subscriptions you don’t use. This brings the dual joy of leaving you better off, while simultaneously removing the guilt of not going to the gym.

You can try a brand switch too, in which you trade household brands in your supermarket trolley for the supermarket own-brand (at half the price), and see if you can spot the difference.

Only after you’ve done the easy things is it worth tackling those you might find more difficult - like revisiting how often you buy lunch at work, have a morning coffee, or indulge in a Friday night take-away.

5. Actually repay the debts

When you free up cash from your budget, the temptation is simply to spend it on something else. The best way to avoid this is to remove the temptation entirely, and set up a direct debit to come out of your account at the start of every month, to pay off your debts.

6. Don't borrow anymore

If there’s one thing that will undo a detox overnight, it’s being tempted to use your 0% credit card to spend. Many of these have higher interest rates on spending, and even if you’re not paying handsomely for this borrowing, more spending just makes paying your debts off even harder.

7. Keep going

Once you have paid off the debt, you can redirect those monthly direct debits into a savings plan. This will enable you to build up an emergency fund for unexpected expenses that crop up, as well as a Christmas fund for next year – so that this is the last year you wake up in January with a horrible festive hangover.