How to avoid getting into debt?

Debt becomes a problem when your repayments are unaffordable, or you can’t make them on time. If you’ve found yourself in this situation, please contact your lender as soon as you can. They’ll want to work with you to help you manage your account.

While every lender is different, some may offer to reduce your repayments for a short time or offer a payment holiday while you get back on your feet. You should let your lender know as soon as you think you’ll struggle to make a repayment; don’t leave it until after your repayment is due.

Several charities and organisations in the UK offer free, confidential money and debt advice. Get in touch with StepChange, MoneyHelper, Citizens Advice, and National Debtline for help and support.

You may also be interested in reading the Little Loans guide to repaying and consolidating debt.

Managing finances and avoiding debt: some tips

Understanding budgeting, saving, and accessing credit when needed can all play an important role in everyday financial well-being. However, managing from one payday to the next, or planning for the longer term, isn’t something everyone has had the opportunity to learn. At Little Loans, we want to help you feel more informed and confident in the financial choices you make. That’s why we’ve put together this guide to support you in understanding your money more clearly.

1. Create a monthly budget

Setting a monthly budget is the first step. Knowing what you have coming in and where it goes out could help you manage your spending and maybe even spot ways to make savings.

Creating a budget can be a lot simpler than you might think. Here’s how to get started:

• Make a note of your guaranteed monthly income. This could include money from wages, a side-hustle, and/or benefits.
• Next, list your essential monthly costs, such as housing, bills (including Council Tax), and food. You should also include any credit accounts you already have, like a credit card or a loan.
• Subtract (take away) your essential costs from your income.
• The amount of money you have leftover is called your disposable income. You can choose to spend or save this money (or maybe do both).

The charity MoneyHelper has put together this free budgeting template that you may find useful.

2. Save money—if you can

Saving money can be tricky, especially if your monthly budget is stretched. However, any amount of money saved is an achievement. You don’t need to set aside hundreds of pounds a month to make a difference. Whether it’s £100, £10, or £1, it all adds up over time.
Having some savings set aside can help you cope with unexpected financial emergencies.

Ask yourself these 5 questions before you reach the check-out

• Can I afford it?
• Do I need it…
• …or do I just want it?
• Will I use it?
• Could I get this cheaper elsewhere, or borrow it from family, friends, or a community group?

Thinking carefully before you buy can help prevent impulse spending.

3. Increase your income

There could be ways you could increase the amount of money you’ve got coming in each month, whether that’s by selling your unwanted items or maybe starting a side hustle. Please be aware that you may need to pay tax on the money you earn from your side hustle. You can find out more about ‘side hustle tax’ by clicking the link.

If you have a hobby such as crafting, cake-baking, or website design, you could turn your passion into pounds.

4. Know the risks involved with credit

Are you thinking of taking out a credit product?
Borrowing money, whether that’s a loan or a credit card, is a serious commitment. Before applying for credit, it’s important to make sure the repayments are affordable. Repaying credit shouldn’t mean you can’t afford your essential costs, such as housing, bills, and food.
A late or missed repayment will be reported to the credit reference agencies (CRAs), and this will harm your credit score. Your lender may also charge you a fee.

5. Think very carefully before you decide whether to apply for credit

It’s helpful to do thorough research and explore any other options that could be available to you before you make an application. If you’re dealing with an unexpected expense, you might want to use your savings, if you have them.

6. Personal loans: work out how much you need first

Before applying for a personal loan, think about how much you need and what you can comfortably afford to repay.

7. Credit cards: be aware of your spending

Your credit limit is the total amount of money that you’ve been approved to borrow on your credit card.

If you’re worried about your credit limit or feel tempted to spend when you don’t need to, you could contact your provider and ask them to lower your limit.

8. How to avoid getting into debt with credit cards: be aware of introductory offers

Some credit cards offer an introductory period of low or no interest. Once the introductory offer comes to an end, any balance left over or any new transactions you make will be charged interest at the standard rate. You can find your standard rate on your credit card statement.

9. Let your lender know if you’re finding it difficult to keep on top of your repayments

If you’re finding it difficult to keep up with your credit commitments, your first port of call should be your lender. While this might sound uncomfortable, an honest chat with an advisor could help you get back on track.

Credit cards and debt

• It’s sensible to only use your credit card to cover the cost of a necessary purchase that you can afford to repay.
• Stay well within your credit limit.
• If you’re worried that your credit limit could encourage you to spend money, reach out to your provider and ask them to lower it.
• Set a reminder for when your credit card introductory offer ends. Remember that any balance on your account after the promotion has ended will be charged interest at the standard rate.
• If you can, you might want to make more than the minimum repayment amount each month. This will reduce the amount of interest you’re charged. If you clear your balance in full every month, you won’t be charged interest at all.

Don’t forget…

Advice and support are available from the following organisations:

• StepChange
• MoneyHelper
• Citizens Advice
• National Debtline.