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What to do when debt exceeds income?

The idea of having more debt than income sounds scary, and there’s no denying it’s a stressful place to be.

But what do we mean when we say ‘debt exceeds income’? We mean your monthly repayments of loans, credit cards, mortgages, overdrafts, bills, rent and store cards add up to more than your monthly take-home income.

The total debt could be many times your annual salary, but for now, that’s not what we’re talking about because it’s not how debt repayment works. For example, everybody expects their mortgage, to represent several times their annual salary, but it’s a perfectly normal way to own a house.

When clearing debts, it’s all about pacing your repayments so that your income covers them and the interest they accrue.

Lifestyle choices

The first thing to ask yourself is which of your debts are actually choices on a month-to-month basis. To be brutally honest, if you consider eating out, designer clothing, holidays and taxis as essentials that you’re not prepared to give up, it’s going to be harder to get on top of things.

Sure, your lifestyle is part of who you are, how you socialise and maybe even how you do business, but there will always be ways you can cut back – skipping a drink here, a dessert there, considering holidaying closer to home. It’s amazing how much difference a few cutbacks can make.

Debt priorities

For many people in financial trouble, excessive spending isn’t the problem – it’s a genuine struggle to meet debt obligations on their current income. So whether you’re living the high life or scraping by, it’s important to start getting on top of your debts.

The best way to start tackling crippling debts is to identify the ones causing the biggest problem and clearing them first. If you have multiple credit/store cards, look for the one with the highest interest rate and aim to clear that one first, even if it isn’t the largest balance.

Pay the minimum payment on all the other cards and put the rest into the high interest one. Assuming you can only afford to repay a certain amount each month, that’s the quickest way to clear debt. Once that’s paid off, move onto the second highest.

Better still, see if you can move the balance of your more expensive card(s) to your cheaper ones. There may be a one-off fee to do this, but many card providers will do that.

Keeping in the black

Don’t assume that overdrafts are cheaper to manage than credit cards. Even small overdrafts can cost a pound a day to maintain, which will add up to much more than a credit card charges.

It might sound odd, but if you find yourself going into the red as payday approaches, it’s sometimes cheaper to start spending on your credit card to keep your bank balance in the black. A few pounds of credit will cost only pennies in interest compared to pounds of overdraft fees.

Obviously this changes from bank to bank and card to card, but do the maths and you might find it’s worth your while.

Switching cards

Another way to reduce your interest costs is to switch your credit card balance(s) to a purpose-built balance transfer card. You might qualify for zero or cheap interest rates for several years, and as long as you’re disciplined, you can save hundreds of pounds in interest, which means you’ll have to pay less each month and you’ll be able to pay off your cards more quickly.

Remember, there are money transfer cards, which can help you pay off your overdraft at zero or low interest for quite long durations.

Whether you have the option of switching cards will depend on your credit rating and your personal circumstances. You can see if you qualify without affecting your credit score by using our Card Checker.

Be card smart

People getting themselves out of debt often relax when the first few hundred pounds are paid back, and go back to their old ways. But it’s essential you stick at it for the duration. Maybe allow yourself little rewards here and there, but keep your trajectory in the downward direction and you’ll find everything speeds up as you approach zero.

Try not to use your low-interest balance transfer cards to make purchases, as they will usually be at normal interest. Keep your credit cards solely for emergencies.

The good news…

The tips above might help you with your credit card debts, but we appreciate there are usually underlying problems that can tip people over the edge, and credit cards and overdrafts might only be the tip of the iceberg.

If any good can come out of a spell of debt, it’s that in paying back their debts, people will often pick up money management habits they carry with them for the rest of their lives, making it less likely they’ll suffer the same issues again.

We urge you to stay in touch with all parties you owe money to. Often, if you explain your situation some of them might be able to make things easier for you. For independent advice, try Citizens Advice Link opens in a new window and the National Debt LineLink opens in a new window.