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How to avoid debt

How to avoid debt

We understand, here at PayPlan, that debt is an everyday part of life. After all, without debt products such as mortgages many of us would be unable to own a home and for those who attend university, a student loan is a necessary requirement.

Manageable debt can help us to live happily. However, when debt gets out of control or unexpected changes impact your finances, the problem can take over your life. That’s why it’s important we understand what to do, to put ourselves in the best place to avoid debt and continue living life without worry.

This guide from PayPlan breaks down everything you can do to reduce your likelihood of falling into problem debt and how to cut back on everyday expenses to free up more money for your all-important savings buffer.  

Plan for the unexpected

Life has a habit of throwing a curve ball, which is a key reason why many people find themselves in financial difficulty.

Whether it’s losing your job or having to take time off work due to illness, you can prepare ahead. Some physical and mental health difficulties have the potential to be life-changing, so planning for these and seeking help as quickly as possible when they occur, could have a positive impact on your whole life.

To avoid getting into unexpected future debt, create a savings buffer with any surplus you have – aim to save up to at least three months worth of income in an emergency fund as part of your future-proofing plan.  

If you are able, assign a small amount of money in your budget to transfer into a savings account each month. You’ll be amazed at just how quickly the total can reach a significant amount. This money can then be set aside for emergency situations or big events in the calendar, such as Christmas or birthdays.

We understand that for many people they may not have a great deal of disposable income after their bills have been taken out, but take £10 a month, for example:

If you put aside 12 instalments of this in time for Christmas, you’ll have £120 to spend that you won’t have to make repayments on later. This means you won’t need to make use of a credit card or borrow money to cover some of those expensive festive costs.

Top up your savings without having to think about it by setting up a standing order to transfer a set amount each month into your savings account. Only do this if you feel confident that you can afford it though – or ensure you can access your savings account and withdraw money as and when needed.

Future proofing your finances for those big milestones

Having a savings buffer allows you to plan ahead and ensure those big life moments are covered – especially if they come along unexpectedly.

A new baby, marriage, buying a home, changing your job – all of these can be supported by this savings buffer if an emergency expense arises at the same time, allowing you peace of mind while avoiding debt and enjoying these milestones.

Find ways to cut costs

Cutting back on everyday expenses can free up money to be saved. Here are a few things you can tackle first:

  • Switch energy suppliers – Something as simple as moving electric and gas suppliers can save you hundreds of pounds every year on your bills.
  • Try a cheaper supermarket – Give a budget supermarket a go, as they are known for their lower prices.
  • Check you have been allocated the right council tax band – Many people pay too much for their council tax, so double check you are in the right band. If you are not you may be due a refund, which you may be able to set aside as savings. Use the Gov website to find out what your council tax band should be.
  • Cancel unnecessary subscriptions – If you don’t use your Netflix account or rarely visit the gym but still pay a membership fee, then cancel these and save a little extra cash.
  • Avoid takeaways and eating out unnecessarily – Try cooking from scratch and buying items in bulk that can stretch across a variety of tasty meals.
  • Walk or bike when you don’t need to drive – Cut down on the cost of fuel and get some exercise in at the same time.
  • Challenge renewal costs for insurance – It’s likely if you call your supplier and ask for a better deal they’ll find a way to discount your price to keep you as a customer.

Maximise your savings

If you have a savings account, check it is delivering the best return on your money. There are a huge variety of savings accounts available that can help you put money away and save for a rainy day:

  • Easy access savings accounts: Allow you to access your money instantly and withdraw it when needed. They’re handy for emergencies, as many come with a card to give you access to cash at ATMs or over the counter at the bank.
  • Cash ISA: Offer tax-free interest. There is a limit of £20,000 that you can put into these accounts and the interest you get is usually higher than a normal savings account.
  • Regular savings account: If you want some discipline when putting away money, these savings accounts limit the number of withdrawals you can make per year. They also limit how much you can transfer each month, but often offer better interest rates than easy access savings accounts.

Shop around for the best interest rates and do this annually to be sure you’re not missing out. Comparison sites, such as Compare the Market or Go Compare, can often help you find the best deal.

Avoid unnecessary purchases

If you cannot afford a non-essential purchase – such as an all-inclusive summer holiday – without credit, then ask yourself: how will you pay for it later?

The best way to afford those big things we want is to simply save money for the purchase, by setting a realistic goal and working towards it.

When it comes to holidays, many travel agents offer an instalments payment option that doesn’t require a credit deal and avoids you needing to use a credit card or overdraft to cover the cost. This can be a real help, so look out for this if you are shopping for a holiday.

Budget effectively

Budgets are important when you are trying to manage your money effectively and avoid debt. They ensure all of your important expenses are covered so that nothing is missed or paid late, while also leaving some spare cash for savings and emergencies.

Try out the 50/20/30 rule

Some people find that the 50/20/30 rule works best for them. This means:

  •  50% of your income goes towards essential living expenses including your utility bills, rent or mortgage, food shopping and fuel.
  •  20% of your income is put towards financial goals, such as savings and making repayments on any debts that you may owe, such as a credit card or a hire purchase loan for your car.
  •  30% is left for disposable income, so you can use this to buy things like little treats such as cinema tickets or new clothes. You don’t have to spend this whole 30%, of course, so whatever is left over at the end of the month can be added to your 20% budget!

You can swap and change these percentages as you see fit – we understand that not everyone will have 30% left after their bills and other necessary expenses have come out – but creating a set structure can help ensure all your costs are covered.

Find a way to keep track

You could also start to keep a spending diary – either in a notebook or on a spending tracking app.

There are a wide variety of apps available, some link automatically to your bank accounts, while others require you to input your transactions manually. Here are some examples of ones you can download and try out:

Spending Tracker

Cost – Free

Available via the App Store and Android

You will need to manually input your transactions on this app but it breaks down what you have spent into categories for a clear overview.

OnTrees Personal Finance

Cost – Free

Available via the App Store

This is one of the most popular personal finance apps available. It links directly to your bank accounts and compiles all of the data, so you can quickly see where you are spending the most money.


Cost – Free

Available via the App Store and Android

Wally is user-friendly and compiles information directly from your bank account, so you can see where you’re spending and where you can cut down.

Tracking your budget on a daily basis is a great way to stay in control – simply find a way that works for you.

Avoid finance deals where possible

‘Buy now pay later’ deals and 0% interest offers can be enticing, allowing you to get your hands on a big purchase such as a sofa or laptop immediately, without any upfront expense. However, a lot can happen in that six-month period that could affect you making repayments.

In fact, it’s easy to set these deals up then forget about them altogether. This can lead to missed payments and a knock-on effect on your credit rating further down the line.

If you do wish to use one of these deals, put a plan in place to ensure you can definitely afford to make monthly repayments later. If not, saving until you can afford the items and paying up front, is usually the safer option.

Don’t use credit when you have cash

It may be tempting to keep what’s already in your bank account tucked away and to use a credit card instead, but if you spend that money elsewhere and don’t have a way to make repayments on what you’ve borrowed, you could find yourself in some trouble.

If you have cash in the bank, avoid using credit to pay for everyday purchases – unless you’re working on rebuilding your credit rating. In which case, have a strict plan of what you can use it for – such as when paying for fuel or weekly food shopping. Aim to pay off your full credit card balance every month, to avoid interest accumulating.

Ensure you understand all the terms and conditions

Before signing any credit agreement or using credit, take the time to read the terms and conditions. It may seem like an onerous task but there may be a reference to fees and charges that could catch you out later down the line, or information about interest rates that could impact your ability to make your repayments in full. Ensure you fully understand the limitations and rules around any credit products you have to avoid issues later.

Look for better deals on big purchases

To avoid spending more than you can afford on big purchases, shop around to find the best deal.

Cheaper deals can often be found online, or by waiting for peak sales such as Boxing Day or on Black Friday. Cheaper alternatives in previous models or last season’s colours could also be a star buy, with considerable savings.

Check your tax code is correct

Your tax code is set by HMRC but it’s your responsibility to check this regularly to ensure it is correct, and that you are paying the right amount in tax. If you are underpaying this can be costly and HMRC may contact you to ask that you pay back what you owe.

Check your latest wage slip for your code, then use the Gov.uk website to check what code should be applied to you.

If you find you are already underpaying and you can’t afford to make up the difference in one full payment, you can set up a repayment plan via your wages, so that they take a little more than they usually would each month.

Make repayments on time

Setting up a direct debit for bills and credit products is the easiest way of ensuring your repayments are made on time and in full. Ensure the direct debit is planned in on a date where you feel confident there will be money in your account.

We recommend assigning your payment date to occur two or three days after your usual allocated payday. This ensures there is plenty of time for money to arrive in your bank account and any issues can be rectified before the bill date. So, if you are paid on the very last working day of the month, assign your bill payments to come out on the 3rd or 4th of the following month.

Making repayments on time and in full ensures you do not have to deal with additional fees and charges that can quickly increase the debt you owe and cause you bigger issues.

Limit how many credit cards you have

For some people, if they have more than one credit card, it can feel hard to keep track of how much is owed and to which company.

It’s better for your credit rating to avoid having a large amount of credit available that you aren’t using. If you need to apply for credit in the future, such as a mortgage or a home improvement loan, then potential lenders may feel nervous seeing available credit sitting there that you are not using. This is because if you decide to borrow it all at a later point, it could put their repayments at risk.

If you have any credit cards you do not owe money on and do not need, then cancel these. Simply get in touch with the company they have been arranged through and ask that they shut down your account.

Pay off the balance on your credit cards

Set up a reminder each month to pay off the balance on your credit card at the end of every month. This will ensure the amount owed does not steadily creep up and allows you to keep a handle on your borrowing. It’s also great for your credit rating as it proves you can borrow money and pay this back regularly and in full.

Only borrow what you know you can afford

Many people use a credit card to improve their credit rating, borrowing small amounts and repaying this back in full every month, to prove they can manage money. By using credit and ensuring you have enough to repay it in the same month, you do not fall into large amounts of debt. 

Use cash instead of card

Using cash is a great way of keeping tabs on your spending and generally. People are more careful with cash as they can physically see the total reducing in their wallet. Not only will you spend less, but it will also give you a greater appreciation for how much money is needed for everyday costs. It can also help when budgeting, as it encourages you to take out a set amount after your bills have been paid to ensure your limitations are met.

Don’t sign up for a credit card just for rewards

Lots of credit card companies are now offering rewards and cash back on purchases made using their cards – and while an airport lounge pass or £5 worth of Nectar points sound like enticing offers, ask yourself whether it is worth the initial cost and requirements.

As you are often incentivised to spend more money to obtain these extras, it is all too easy to find yourself in debt.

Ensure your overdraft is authorised

If you feel that your current monthly spending may require you to dip into your overdraft, ensure it is agreed with your bank. This means you will be allowed to borrow up to a certain amount and a small fee will be charged per day until it is paid off.

Dipping into an unauthorised overdraft can be very costly and lead to debt problems. The charges could even exceed the amount you’ve gone over by, adding to what you need to repay to get back into the black. Fees vary per bank but typically an unauthorised overdraft will charge around £1 to £6 per day or £5 to £35 a month. If the overdraft is used for direct debit payments a charge will be applied to each of these, ranging from £10 to £25, which can quickly add up.

Remember, an overdraft should only be used in an emergency situation. Speak to your bank if you need an extension if you know you are going to run over when making payments.

Avoid debt consolidation

Many people try to shift their debts around to avoid interest and fees, especially when they are using credit cards. However, debt consolidation can cause bigger issues later, as you discover the larger debt amount means larger fees and interest charges. This can put a strain on your ability to make repayments.

We have a detailed guide on debt consolidation and its pros and cons here on the site. If you are already in debt and struggling to make repayments, a debt solution such as a debt management plan may be a better solution.

Seek help with your health

Avoid debt and mental health affecting each other

Mental health problems are one of the leading causes of debt – as people feel out of control and this may lead to spending splurges that they cannot afford. If you are struggling with mental health, charities like Mind or the Samaritans can offer support and help.

Many people also leave their debt problems for too long and this can have a negative impact on their mental health. Speaking to an expert – or even someone close to you – sooner, rather than later can help your mental wellbeing, as well as your financial situation. They may be able to offer a solution on how to avoid debt or get out of debt and could offer support along the way.

Help if you are living with a disability

If you are living with a disability, ensure you are receiving all the benefits that can help you financially. This could help you to avoid getting into debt in the future.

This may involve contacting your local council and speaking to them about the help available – you may be entitled to receive Disability Living Allowance, Employment and Support Allowance or if your disability is due to a work accident – Industry Injuries Benefit. The Gov website has more information on this – click here to find out more.

Consider life insurance and critical illness cover

If you can afford life insurance, consider adding critical illness cover. This can ensure you are protected for the future in case you fall terminally ill or cannot work due to illness.

This type of cover can help pay your mortgage and bills and protect you and your family from debt if you are unable to work. Shop around to find a good deal with a cover provider.

Seek financial advice

Impartial financial advice is available to help you secure your future in a way you can afford now.

Our team here at PayPlan are here if you need any further help or advice when it comes to avoiding debt or making repayments on debts that you owe.

You can speak to our expert team on 0800 316 1833 who can help you find a debt solution that works for you or discuss any issues you may be having. It’s best to seek help as early as possible to avoid debt or prevent it from increasing further.

Let’s make life more affordable

You’re just two steps away from taking back control of your finances and freeing up more money for you and your family.

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