Ten steps to tackle your debts in January

The temptation to spend in the last two months has been almost impossible to resist. We saw unprecedented discounting in the run up to Christmas, then we faced the obligatory annual spending frenzy in December, and finally we were drawn in by rock-bottom January sale prices. It was an expensive end to what has been another pricey year, and unsurprisingly saw debts surge.

At the moment, the average household has more than £5,800 of debts. In many cases, borrowing has been managed sensibly, and is under control, but if your level of debt has come as something of an unwelcome surprise, it's vital to get on top of it sooner rather than later. There are ten steps to dealing with debts, and this January is time to do them all.

1. Calm down
When you start to worry about your borrowing, you can get to the point when you are too emotional to think straight. It means you need to deal with your state of mind before you go into the practicalities.

A key part of this is to talk to someone about your debts. This may be something you are dreading bringing up, but it's essential, because trying to hide your debts is just going to lead you into more overspending. Your loved ones may be surprised, but most people will be able to offer some support and help you deal with things more calmly.

2. Work out exactly where you stand
You need to know exactly how much you owe, and how much interest you are paying on your borrowing. You also need to be aware of what else you have to pay for - and when. The only sensible way to do this is to draw up a budget, and look at your regular outgoings - and when they are going to hit you next.

That way, you're not going to have any more unexpected surprises, and you can plan your spending properly. The other big advantage of having everything written down is that it helps you focus on the whole picture, and not just the bills that are coming in.

3. Look at how much you are paying for your borrowing
If you don't know how much interest you are paying, this is the time to check more closely. If you are carrying a debt on a more expensive overdraft, high interest credit cards or store cards, then look into switching what you can onto a loan or card with a lower rate.

Unless you are going to check this on a monthly basis, opt for something with a long-term low interest rate, so you can pay down your debts without worrying about your interest rate shooting up again a few months down the line.

4. Look for the leeway in your budget
Don't think you have solved the problem just by making your debts cheaper: you also need to pay them down, and in order to do this, you need to find the money from somewhere.

Your budget is the key to this, as you can see exactly what you are spending in every area of your life. It's worth digging out bank and credit card statements for the past few months to assess realistically what you are spending.

Don't use this as an opportunity to beat yourself up about your spending: it's a chance to make changes. You need to see if you can switch utility, phone, broadband and media suppliers to reduce your outgoings. You need to look at regular spending from which you get little or no benefit - such as gym or club memberships you are no longer using. You need to address where you are spending too much on the basics - such as buying expensive branded groceries. And if you are still spending more than you earn, you also need to look at where you can make some more serious lifestyle sacrifices for your long-term financial security.

5. Prioritise
While you are juggling your budget to free up some cash, the bills will keep coming in, so you need to prioritise them. The top priorities may not be the largest debts, and they may not be the companies that are contacting you most often to get you to pay: they are the ones which could put your home at risk (the rent or mortgage), the ones which could force you to go bankrupt (tax), the ones which could cause your heating or lighting to be cut off (utility bills), or any debt for which you have received a court summons (which will otherwise get very much more expensive).

You also need to keep on top of your TV licence, hire purchase agreements (as long as the item you're paying off is essential) and any court fines. While you pay these things off, you need to make the minimum repayments on your other debts.

6. Snowball your debts
Once you have dealt with the priorities, look at the debts you are paying the most interest on, and pay the maximum you can afford off on it each month (while sticking to your other credit agreements - making any regular loan repayments and minimum card repayments). Once you have paid one off you'll be paying less interest, and you'll also have the psychological boost of having cleared a debt.

7. Be realistic
Paying down debts us a long-term process, and as long as you are on top of your borrowing, it's not something you should be losing sleep over. Don't try to pay too much too soon, or you won't manage to stick within your budget, just work out what is realistic and stick to it.

8. Talk to your lenders
As long as you are paying the minimum required on all of your borrowing, your lenders will be satisfied. If there's any chance that in the short term you may need to miss a payment, then before you fall short of any agreement, you need to contact the lender.

They will have a department specifically set up to deal with people in your situation, and in many cases they will be able to help - possibly by offering a repayment holiday, by freezing the interest for a number of weeks, or by agreeing to a more long-term repayment schedule. This will have an impact on your credit record, and should only be something to consider if you have genuinely done your best to stick with the agreement, but is far better than just missing a payment and hoping for the best.

9. Get some support
If your debts are causing you concern, it's always best to get some support. If you can get back on top of your debts yourself, it may just be a matter of leaning on a friend or family member for the emotional support to get you through.

However, if you are finding it hard to get your head around things, or you cannot see how you will be able to afford repayments, you can approach a debt charity like Step Change or Citizens Advice, who will be able to help you through the process and explain all your options.

10. Learn the lesson
It's striking how many people go through this process more than once. When you come out of the other end of dealing with debts, it's essential that you take a sensible approach to borrowing in future - weighing up the best ways to borrow and the sensible reasons for it.

At some point in their lives, most people will need to borrow money again, and by picking up good habits and a sensible approach, you can protect yourself from making the same mistakes next time.

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