Debtbuster guide

The number of people with serious debt problems is rising sharply. More than 3,000 people were declared bankrupt in 2006 owing more than £100,000 each in unsecured loans. Recently the Consumer Credit Counselling Service, one of the UK’s largest debt charities, warned that the number of people owning more than £100,000 has almost doubled over the past two years.

At the same time Government figures show that the number of people filing for bankruptcy has risen to record levels for the third year running. In total Brits now owe a whopping £1trillion – and much of this rising debt mountain has been fuelled by a boom in credit cards, store cards and personal loans.

If you are one of the thousands of consumers who are concerned that your spending is getting out of control, then help is at hand. Our debtbuster guide is designed to help you put your finances on back on track. Follow the five points below and you should manage to stay clear of more serious debt problems, which can lead to insolvency or bankruptcy.

Step One: Identify the problem

The first step is to face up to the fact that you have a debt problem.

Make a list of all your various debts and find out exactly what interest rate you are paying on different loans, credit cards, store cards, mortgages etc. This will help you identify the most expensive debts, which need to be paid off first.

It is also important to understand why you have become saddled with a debt problem. Are you in the red because you regularly spend more than your earn each month, and use credit cards and overdrafts to bridge this gap? Perhaps a career change, divorce, unemployment or illness have reduced your income? If you know why your spending has spun out of control, you are in a better position to draw up an effective plan of action, and there is less chance of falling into the same trap again in future.

Step two: Reduce borrowing costs

You want to pay as little interest as possible on any outstanding debts, so pay off the most expensive debt first. Savvy consumers will shop around to ensure they are getting the best deal on loans, credit cards and overdrafts.

However, moving debt around comes with a several health warnings. If you are repaying an expensive loan, ensure there are no early redemption penalties. Remember taking loans over longer periods may reduce monthly repayments, but it will increase the total amount of interest you pay. Short term gain can spell long term pain.

It goes without saying that if you are taking out a loan to repay a credit card or store card debt, then always, always, always cut up the offending piece of plastic. If you don’t, the temptation will be to start spending on it again, and before you know will be juggling your new loan repayments with an ever-growing monthly credit card bill.

Similarly tread carefully with low-cost or zero per cent credit cards. By all means use cheap balance transfer rates on offer to pay off existing debt, but on no account go on a shopping spree with your new card, however attractive the interest rate. Before you know it the “introductory” period will be over, interest rates will have soared skyward and your debts will be larger than ever.

If you are the kind of person that can’t walk by a shop window without feeling an itch to get your wallet out , then don’t apply for new credit cards, cheap loans or extended overdrafts – however cheap the rates on offer. Rather than “shuffle” debt around, concentrate instead on making repayments on existing debts and cutting spending.

Step Three: Reduce your expenditure.

Its tough, but you have to rein in your spending if you want to wave bye-bye to spiraling debts. A recent survey by Bradford & Bingley claimed that 30 per cent of Brits said their salary was not enough to live on. You may have muttered similar things yourself in the past while paying for the latest electronic gadget, essential wardrobe items or dream holiday on credit.

The easiest way to control spending is to budget. Start making a log of where your money goes – fishing out the last few month’s bank statements can help. Think about what is necessary and where you can save money. Set yourself a monthly spending allowance and – this is the difficult bit - stick to it. You may also want to start thinking about negotiating a pay rise.

Step Four: Get free advice

Those with serious debt problems need advice. But be extremely wary of many of the debt counseling services currently being advertised. Most of these are commercial operations that are interested only in selling you more credit or charging a fee to manage your debts. They do not provide independent advice and can end up costing you an arm and a leg.

However, there are a number of helplines and advice services available. All will listen to your problem and suggest constructive steps you can take to get on top of your debts. They are: the Consumer Credit Counselling Service the address and phone number of your local branch will be in the yellow pages.

Step Five: Keep in touch with your creditors

If you have reduced borrowing costs and cut spending but are still struggling to repay your debts then talk to the lenders involved. In some cases lenders may be prepared to help, perhaps freezing interest on the debt or lowering monthly repayments. After all most banks would prefer it if they at least recoup some of their money, perhaps over a longer period of time, than have you go bankrupt which could mean the debt being written off altogether.

Similarly don’t avoid the issue by ignoring calls or letters from your bank or credit card company. 

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