How To Manage Personal Debt |

nigel woollsey

Nigel Woollsey

Online Writer
Published: 03/02/2020

At a glance

  • Budgeting is a simple tool that can help you avoid taking on additional debt. You don’t need an accountant to create a basic budget and this can make you feel more in control of your money.
  • Always shop around for the best deals – this applies just as much when looking for credit to fund a large purchase. Make sure you get a loan with the lowest possible APR, or better yet, an interest-free period.
  • Never ignore your levels of debt. Keep an eye on what you’re repaying and act quickly if you feel your debts are getting out of control.

Most people have some form of personal debt, whether that may be in the form of a loan, finance agreement, credit card or overdraft. Credit can be a very helpful way to spread the cost of items with large price tags, such as cars, holidays or home improvements. However, problems can arise when people borrow beyond their means.

To help you understand the best way to handle credit and the warning signs of a downward debt spiral, we’ve put together this guide.

Top seven good debt habits:

Keep your head above water with these seven tips.

Make a budget

If you’re serious about getting into good financial habits, then a budget is a must. You can’t start to manage your money until you know where your money is going.

Determine what you are spending by using your latest bank statement to check what’s regularly coming out of your account.

Now you can see where your money goes you can start to fix any problems. Keep on top of your budget and regularly update it when the price of things changes, when you stop paying for some things and start new expenses. A budget needs to be relevant to be useful.
For practical advice and tips on budgeting, see the section ‘How to budget’ below.

Set spending limits… and stick to them

Set yourself a spending limit per month and stick to it. Before making that impulse purchase, stop and ask yourself: “Do I need this, or do I just want this?”.

Give yourself a cooling-off period: Promise yourself not to spend over a certain limit on anything without waiting 24 hours. This way you can often avoid the dreaded ‘impulse’ purchase.

Start to grow an emergency savings fund

Keeping a tight rein on your finances and avoiding the credit trap can be difficult in the face of unexpected expenses. Boiler breakdowns, car trouble or a sudden vet’s bill may have you running for your credit card.

Instead, concentrate on putting some money aside on a regular basis and commit to not touching it, except for genuine emergency expenses. This has the advantage of earning you interest instead of repaying it.

The best time to put savings aside is when you have money – so set up a standing order that will automatically put your savings into a different account on or just after payday.

Pay bills on time with a direct debit

Make sure that your utility and other regular bills get paid on time by setting up payment by direct debit.

This not only means you don’t have to worry about remembering to pay a bill it also ensures your credit score isn’t adversely affected by providers logging missed payments.

Keep a regular eye on your bank account

Online banking, smart apps and text message alerts mean you can keep a close eye on what’s coming and (more importantly) leaving your account.

Even though providers can’t charge you more for an unarranged overdraft, you’ll still be looking at extra charges for spending more than you have.

So, not only will you be avoiding unwanted penalties, you’ll feel much more in control of your money.

Pay more than the minimum on credit cards

Possibly one of the most important rules when managing credit and debt is to always pay off more than the minimum amount on credit cards.

The longer you take to pay off a credit card, then the more you will end up paying in interest. Paying off just the minimum payment on a credit card means you will take a lot longer to repay the debt – all extra time that the credit card company will be charging you interest.
Instead, pay off as much as you can afford each month. This doesn’t have to be the whole amount outstanding – even just a few pounds more than the minimum payment will make a difference over time. Best of all, set up a regular standing order for that amount so you won’t even have to worry about making a manual payment.

If you have an unexpected surplus of cash in a month, consider using this to reduce your debt, rather than popping it in savings. Currently, interest rates on savings accounts are much lower than those being charged as interest on credit cards, so paying off your debt before saving makes good economic sense.


Make good use of comparison sites. Whether you are shopping for insurance, a new energy supplier, mortgages, savings or a new credit card deal, comparison sites can not only save you cash, but you might find a better product for less than you are currently paying.

With the high levels of competition out there between companies that want your business, it pays to shop around when an old deal finishes, or your renewal date approaches. Doing so ensures you are getting the most value for your money.


Want to know more about credit scoring?

The danger signs of debt

Financial problems very rarely creep up on people. For most people, the warning signs may have been there to see for quite some time. The following are examples of the most common ‘red lights’ that can indicate that your borrowing or your finances are out of control. 

You are worried/anxious about your level of debt

Being worried about your level of debt to the point whereby you are losing sleep, or it is having a negative effect on your life or of those close to you, should be treated as a serious warning.

Money worries are one of the biggest causes of stress, anxiety and depression, so you should act quickly to assess your current levels of debt and put a plan in place to start tackling your credit crisis.

If you are having difficulty doing this on your own, then you can always visit the Government’s own Money Advice Service website or your local Citizens Advice. Both of these examples provide free, impartial advice and practical help on ways to manage debt.

Not everyone finds it easy to talk about financial problems to family or friends. If you find yourself unwilling or unable to speak to anyone else then you will always find help by calling The Samaritans.

Keeping debts a secret from family or partners

This goes beyond simple privacy issues. If you are keeping your level of debt secret, or worse yet, misleading those closest to you, then this is a sure sign that your debts have grown beyond your capacity to deal with them.

No spare cash for unexpected bills

People who are in serious trouble with debt often have no savings to fall back on. Consequently, they struggle with unexpected bills such as a sudden boiler repair, car MOT or vet’s fees. Often this can lead them even further into debt as they borrow more to cover the expense.

Using a credit card to pay for everyday spending

If you are having to use your credit card to pay for everyday expenses – such as groceries, petrol, utility bills, etc. and not clearing the balance each month, then this should be treated as a big, red warning flag. Worse yet is getting cash advances from your credit card to pay bills with.

You consistently outspend your wages (and any overdrafts)

If you can’t get through a month without having to borrow money to live on, then your debt level is out of control. In addition, having to use your whole overdraft amount every month is not a sign of healthy finances. What’s worse is if you find yourself regularly breaching your overdraft limit as you struggle to pay everyday expenses.

Your debt repayments make up more than 20% of your monthly income

Spending more than 20% of your monthly income on servicing debts means you are approaching a point where the amount you owe is becoming unmanageable. It’s time to look seriously at your position in terms of credit.

You have been refused more credit

Being told that your application for another loan, credit card or similar line of finance has been refused should serve as a valuable wake-up call. Now is a good time to admit that you have debt issues and commit to doing something about it.

Making false statements when applying for more credit – whether that’s from a credit provider or a family member – is a sure sign that your debt level is out of control. Obtaining money under false pretences could land you in court, but worse yet is the damage it can cause to your relationships with those closest to you.

Rising debts and arrears

People with serious debt problems will often see their overall debt levels rising, month on month, as they struggle to make repayments or only pay the minimum required. In addition, any kind of arrears with rent or your mortgage is a sure sign of a rapidly deteriorating debt situation. There are few more serious signs of debt danger than when you are at risk of losing your home.

Impulsive spending sprees

Serious financial problems can make people act out of character or to pretend that a situation doesn’t exist. It’s for this reason that some people who find themselves in a downward debt spiral will go out and spend even more. These impulsive spending sprees are an attempt to make themselves feel better about the situation by buying items they don’t need – which only makes matters worse.

Collection agents and County Court Judgements (CCJs)

Receiving a visit from a debt collection agency or to have a CCJ for debt issued against you is a very serious matter. If things have progressed to this stage you are in real danger of having your property repossessed, as well as losing your home if these debts relate to your mortgage or a loan secured on your property.


Are you retired and struggling with debt?

You may find our Dealing with debt in retirement guide helpful. 

How to budget

Budgeting is an excellent way to manage your money. It enables you to both plan ahead sensibly and to highlight any areas of your financial life where you are spending more than you should be or would like.


Creating your own budget:

Making a budget is easy and can be done at home by anyone with just paper, a pen and possibly a calculator (which you can find on any mobile phone these days).

Step 1:

Start off with recording your biggest expenses first: probably your rent or mortgage payments, followed by your usual household bills (groceries, electricity, gas, council tax, water, etc). Include debt repayments in this too.

Step 2:

Next, cover everything you pay for on a regular basis. This includes things like petrol, mobile phone costs or gym memberships (whether you are using them or not!).

Step 3:

Once you’ve tallied up all your normal expenses, deduct this figure from your usual monthly salary (try to avoid including overtime as you can’t always be guaranteed to get this on a monthly basis).

The amount you have remaining is what you have left for savings and personal spending (nights out, restaurant meals, going to the movies, clothes, music, etc.).

Step 4:

Set aside a sum that you can afford to save regularly every month (and make a commitment not to touch it, except for emergencies).

Step 5:

Look at your expenses with a critical eye. Make sure you aren’t paying too much on utilities, broadband and even current debts. Think about switching by using comparison sites.

The 50/30/20 budgeting rule

If you are wondering how much you need to save from your wages, the 50/30/20 rule is a great help. Popularised by the US Senator Elizabeth Warren, this rule is simple and easy to follow.

Basically, you should divide your income up into these three chunks:
50% goes towards things you need
30% goes toward things you want
20% to your savings.

To find out more about the 50/30/20 rule, as well as needs, wants and what to save, you can find a full explanation in our When to seek help with your personal debt guide .

The best ways to borrow sensibly

Credit can be a very helpful way to spread the cost of high-value purchases. Here are some ways you can borrow sensibly:


Shop around for the best deal

There’s a huge choice of loans and credit cards out there, all with differing rates. Take your time and make sure you are getting the best deal on the lowest rate possible. See our credit card and loan comparison tables to see what deals are out there.

Never break the 20% rule

Your total debt and credit repayments should never take up more than 20% of your total take home income. Beyond this, you may struggle to repay debts – especially if your circumstances change.

Interest-free deals

If you are taking out a loan, finance plan or credit card, make sure that you can repay the whole amount in the interest-free period. Once this ends, you’ll find that the interest rates on will skyrocket and paying things off becomes more difficult.

Remember: Overdrafts are meant to be a temporary form of lending

If you do have to use an overdraft, then make sure you repay in full as soon as possible (ideally the next payday). Overdrafts are meant to be for short-term emergency borrowing, so the interest rates and fees that accompany them can be quite high.

Always pay your bills on time

Even a single missed payment can negatively affect your credit score and damage your ability to get cheap credit in the future. Where possible, pay by direct debit or standing order so there’s no chance of payments being missed.

Avoid payday lenders and loan sharks

Both are likely to charge you very high rates of interest even if you’ve only borrowed a small amount. Instead, find out if there is a credit union in your area who can help you.

Moneyfacts tip

Moneyfacts tip nigel woollsey

If you are worried about debt, struggling to make repayments or your circumstances have suddenly changed (perhaps due to a job loss or bereavement), then contact your lender as soon as possible to discuss repayment options. A lender can only help if they know there is a problem.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

At a glance

  • Budgeting is a simple tool that can help you avoid taking on additional debt. You don’t need an accountant to create a basic budget and this can make you feel more in control of your money.
  • Always shop around for the best deals – this applies just as much when looking for credit to fund a large purchase. Make sure you get a loan with the lowest possible APR, or better yet, an interest-free period.
  • Never ignore your levels of debt. Keep an eye on what you’re repaying and act quickly if you feel your debts are getting out of control.

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