What You Need to Know


Debt Cycle

Spending More Than You Earn

A debt cycle is continual borrowing that leads to increased debt, increasing costs, and potential default.

When you spend more than you bring in, you go into debt. At some point, the interest costs can become a significant monthly expense, and your debt increases even more quickly.

The first step to getting out of the debt cycle trap is acknowledging that you have too much debt. Even if you can afford all of your monthly debt payments, you’re trapping yourself in your current lifestyle by staying in debt.

Signs that you are in the debt cycle include:

  • You’re living month to month for payday
  • You can only afford or struggle to make minimum payments
  • Your debt-to-income ratio is more than one-to-one
  • Your credit card balances rise month on month
  • You’re not saving

If you think you are stuck in a debt cycle or are at risk of getting stuck in one, acknowledging the problem is the first step.

Budgeting is the best way to work your way out of debt, making a plan and sticking to it. See our section on Spending to find out more and to download our free budget template:

Find out more about budgeting

Paying Back Debt Realistically

Creating a budget is the first big step to breaking a debt cycle. Sticking to it is the next. Take a hard look at your spending habits, is it all necessary? If you can’t make more money, look for ways to spend less. For example, you can move to a cheaper location, eat meals at home, and take public transportation instead of having a car.

Other tips for breaking the debt cycle include:

  • Create a Budget – you need to know exactly where you stand. How much income do you bring in each month, and where does all of the money go? Create a budget so you know your situation.
  • Put away credit cards – credit cards aren’t necessarily always bad, but they make it too easy to fall into a debt spiral. Put credit cards away to avoid temptation.
  • Change your habits steadily – don’t just focus on big wins, small changes matter like limiting takeaways or coffees
  • Cut your borrowing costs – consolidating debt with the right loan may help lower high-interest rates so more money goes to paying off the debt. Do research if you are considering doing this and make sure the interest rate is lower than what you are paying.
  • Supplement your income – could you get a part-time job or side hustle whilst you pay off your debt – pet sitting, baking cakes, selling items you no longer need?
  • Save for emergencies – sometimes, people end up in debt due to unforeseen circumstances. While that debt might be unavoidable, in many circumstances it could have been avoided by saving up in advance for emergencies.

If you are feeling overwhelmed by your financial situation seek help. There are a number of charities and organisations that offer free independent advice and can help ease anxiety and help you get back on track. Look at:

National Debtline, StepChange, or Citizens Advice.

Also, the Money Saving Expert website has a debt guide which shows you where to start and how to get free one-on-one help.

Credit Score

What Is A Credit Score?

Your credit score gives you an idea of how companies may view you when you apply for credit or a mortgage and may help determine how much interest you will be charged. It is a 3-digit number that rates a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders.

In the UK, there are three main credit reference agencies (CRAs):

  • Experian
  • Equifax
  • TransUnion

They securely hold data about your financial history. This is known as a credit report and they use it to generate your credit score. Checking your credit report with a CRA is free and doesn’t affect your credit score.

Why Is It Important?

When you apply to borrow money, lenders will look at your credit score before deciding whether to accept your application. It may also help them decide how much to offer you and how much of a risk it is to them.

A good score can help you get approved for credit cards, loans and mortgages, while a poor score can stop you from getting approved altogether.

If you have a poor credit score, you may find you’re offered a higher interest rate. This can make getting out of debt harder. It could also affect other credit contracts such as mobile phones, meaning you have to opt for worse deals.

How To Improve Your Credit Score

Your credit score is calculated using a points system, based on what’s in your credit report which reflects how you’ve managed your debts and bills in the past.

If you have always paid your bills on time, this would have had a positive impact on your score. But a history of missed or late payments would have had a negative impact.

Also, if you’ve never borrowed money before, it’s difficult for lenders to assess the risk of lending to you and your credit score will reflect that.

  • Register on the electoral roll at your current address – this shows you are really living where you say you are making you less likely to disappear and default on payments.
  • Avoid moving too often – lenders like to see stability in your circumstances. This is not always possible but worth bearing in mind.
  • Build up your credit history – having little or no credit history can make it difficult for companies to assess how risky you are. This could lower your credit score. Responsibly building up your credit history can improve this.
  • Pay accounts on time each month – this shows lenders you’re a safe bet and can handle credit responsibly.
  • Keep your credit utilisation low – this is the percentage of your credit limit you actually use. For example, if you have a limit of £1000 and you’ve used £500 of it, your credit utilisation is 50%. A lower percentage is usually seen in a positive light and should help your score go up.
  • Only borrow what you can afford – getting into significant debt may lead to County Court Judgements (CCJ), an Individual Voluntary Agreement (IVA) or even bankruptcy. These will stay on your credit report for at least six years and will have a significant, negative impact on your credit score.

Whether it’s a loan, credit card or mortgage, a higher credit score means you will have a better chance of being approved. You may also be able to choose from a wider range of credit offers and providers, which can help save you money on interest payments in the long term.

Debt Worries

If you are feeling overwhelmed by your financial situation seek help. There are a number of charities and organisations who offer free independent advice and can help ease anxiety and help you get back on track.

60 Second Debt Test

Debt is small word, but it can be a big problem, and it can get bigger the longer you wait to deal with it. The StepChange debt test below can help you understand how close you are to having a debt problem.