Dear Monzo, I'm £7,000 in debt and I’m struggling to clear it

I’m about £7,000 in debt and I’m struggling to clear it.

I’ve got a loan, a couple of overdrafts and a credit card, and a £3,000 loan from my grandparents with no interest until the rest of my debt is settled. I repay the loans at £190 a month and the rest at about £20 to £50.

I want to consolidate everything, which I tried to do in the past (that’s why I’ve ended up with a loan).

Is there a way that I can pay everything off in one payment or pay my debt off quicker?

Debt stresses me out. It frustrates me that the wages I get paid every month end up going straight back to the debt that I owe.

I have some savings of about £800 in a Lifetime ISA. I chose the Lifetime ISA so that I can’t touch it until I’m ready to buy a house or retire. I used to pay more in, but as I have to pay off my other debts I just deposit the minimum savings every week.

I feel like I’m constantly going around in one big circle, living month to month when I would ideally like to have money left that I can save for holidays or treating myself. What should I do?

The other day, a friend 'confessed' to me that she’s permanently overdrawn and spends hundreds of pounds a month servicing her overdraft. Every time her salary comes in, it’s swallowed whole. And any money she might have put aside towards, say, buying a flat is enriching her bank through interest payments instead.

I would guess there are many, many people stuck in a similar ‘circle.' Debt problems don’t have to mean bailiffs at the door. The reality of debt for many people is often less extreme, but serious and stressful all the same.

I’ll come on to the practical things you can do to tackle interest payments later. But first you should accept that sorting out debt usually means confronting the messy emotions you might have about your finances first.

Debt is rarely discussed, and something that people still, wrongly, feel ashamed about. But not acknowledging how much it costs us can play havoc with our finances, making the situation much more sick-inducing – and expensive – in the long run. According to debt charity StepChange, in just six months, one of their clients with a typical range of debts could waste £2,300 on interest charges.

To start working your way out of the trap, you need to understand exactly how much your debt is costing you. So for the practical bit: you need to do some maths. You mentioned that you’re paying into a Lifetime ISA, but the most useful thing I can tell you is that reducing how much interest you pay on your debts is the most lucrative way to save.

That might feel counterintuitive, because we’re all told setting money aside is sensible. It’s what grownups and people who are 'good' with their money do. By contrast, we’re made to feel like being in debt is 'bad,' which only makes the shame and anxiety even worse! If you already feel frustrated or guilty about being in debt, saving can be a useful way to offset how you feel. When you save, it feels like you’re growing your money and using your earnings to invest in your future. When you’re paying off debts, it can feel like your money’s going straight down the drain. But I’d consider pausing any saving until your overdraft and credit cards are clear.

The reality is that there’s no point in putting a little bit of money in a savings account that’s paying 1 or 2% interest, if you’re simultaneously chipping away at an overdraft or a credit card with interest rates of 20% or more. You could be trapped doing so for years, wasting thousands of pounds.

Even though a Lifetime ISA offers a 25% bonus from the government if you buy a house or when you retire, this sum (£200 on your £800) is likely to be much less than the amount of money you hand over to a bank on a debt of £4,000.

There’s a penalty to withdraw money from a Lifetime ISA, but this might be less than the cost of your credit card interest. So weigh up whether using your savings to pay down debts more quickly might mean you’ll actually be able to put aside more money in the long term.

After making sure your salary covers all essential outgoings (i.e. stuff that you couldn't live without like your rent, food and energy bills), focus anything you have left on paying down your debt, starting with the highest interest rates first.

If you’re paying interest on credit cards, you should consider taking out a 0% balance transfer credit card. These let you shift your debt and use any money you have to pay down the capital (that’s the amount you borrowed), without also paying interest. Most have long periods of a couple of years, but watch out for fees for transferring the debt.

You can also get a 0% money transfer card, which will let you put cash into your bank account to clear an expensive overdraft, without punitive charges.

Debt consolidation or a debt management plan (DMP) is where a company takes over all your debts and writes to the banks that you owe on your behalf, while you pay the company directly in one lump sum each month. They can be reassuring, but be careful. Don’t be persuaded to use a potentially dodgy company you find through Google which charges those already struggling with debt a substantial fee for its services.

Debt charity StepChange offers free, confidential advice, and it’s worth seeking it out, even if that means you have to confront how much your overdraft is really costing you. Its online debt remedy tool will put together a personal budget and tell you whether it’s a good idea to take on a DMP. If so, it offers them for free.

Good luck!

Email Laura at dearmonzo@monzo.com and explain what you're struggling with. She’ll choose one of your letters every month and we’ll publish it anonymously, along with her answer.