If you have debt you want to pay it off as affordably as possible.  It can, however, be complicated to work out how to do this.  Here is some guidance to help.

The two basic strategies for paying off debt.

There are really only two basic strategies for paying off debt.  The first is to pay off each debt individually.  The second is to consolidate them.  In principle, there are two ways you can consolidate them.  One is to do a balance transfer and the other is to get a debt consolidation loan.

In practice, the availability of attractive balance-transfer offers depends entirely on the state of the market.  Admittedly this is also true of debt consolidation loans.  These are, however, essentially a variation of standard personal loans rather than a special offer.  This means there is usually a decent selection of them available at any given time.

Paying off each debt individually

You may have to start by paying off each debt individually, whether you like it or not.  If you are close to your credit limit then you might have to reduce the amount you owe to improve your credit score enough to be considered for a debt consolidation loan.

If you do, or if you just want to try paying off your debts individually, then the technique of choice is called “snowballing”.  Basically, you pay all your disposable income towards paying off the debt with the highest interest.  Then you close the account and move on to the next debt and so on.

Closing the account is important because this shows that you are unable to run up further debt on that line of credit.  For this reason, it may be astute to prioritize paying off any small debts you have even if they are relatively low interest.  Closing the account may give your credit score a boost and open up better deals for you.

Using a debt consolidation loan

There are three main ways in which using a debt consolidation loan could be useful to you.  Firstly, it could simply be easier to manage.  If you make manual payments, dealing with one payment per month could be a lot simpler than dealing with several.  That said, if your money comes in a bit at a time through the month, you will need to be disciplined about putting it aside for later.

Secondly, it could mean that you pay back less overall.  If you have credit card debt, then switching to a personal loan could get you a much lower interest rate.  If you’re concerned about using a secured loan, then be aware that, in the UK, credit/store card debt can be converted to secured debt.  There is a process to go through for this to happen, but it is possible.

Thirdly, it could lower your monthly payments.  Be aware, however, that making lower monthly payments over a longer period could end up costing you more overall.  That said, once your credit score improves, it may be possible for you to refinance at a better rate and have the best of both worlds.

Understanding your credit score

Your credit score is basically an assessment of how likely you are to pay back credit.  Your score is determined by various factors many of which relate to your past behaviour.  Unless you can put these right somehow (e.g. repaying after a default), only time will heal the scars.  Some factors, however, you can control, for example, you can work on staying within your credit limit.

It’s advisable to sign up with at least one of the credit-scoring bureaus so you can see your up-to-date credit score for free.  You can then check this against the requirements for financial products.  This will give you a good idea about whether or not it’s even worth your while applying for them.

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