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Wednesday, 12 February, 2003, 19:00 GMT
How can I manage my debt?
How can I avoid getting into debt?
Debt is a fact of life for many people these days, but if you follow some golden rules you can avoid getting into trouble.
Apart from trying not to overspend, there are some ways of minimising your chances of getting into debt.
One of the most common forms of debt is caused by overspending on credit cards. If you can't trust yourself, avoid them.
If you feel that you can manage a credit card, you should subscribe to one with a low interest rate.
Most people pay over the odds for credit, but there is no need. There are a range of good deals on the market, offering between 0% and 6% interest.
If you opt for a card which has a 0% rate of interest, this is likely to be for a limited period only so it is important to switch to a better rate when the "bonus" period expires.
As a rule you should steer clear of store cards unless you can pay off your balance within the interest-free period. The rates are much higher than normal credit cards.
For example, Kwik Fit charges 31.9% and Monsoon levies almost as much at 30.7% - 30 times as much as the best credit deals.
One of the easiest ways to save money is to switch mortgage deals, which is easy if you are not trapped by redemption penalties or lock-in clauses.
Most people pay the standard variable rate mortgage and are throwing money down the drain.
Should I consolidate my debt in a loan?
Daytime television is littered with adverts from loan companies - many are fronted by well-known celebrities.
They offer a tempting "quick-fix" solution to debt - you take out one loan to cover all your existing repayments.
Having someone else take the effort away from dealing with all your creditors may sound like a dream, but debt counsellors advise people to steer clear of consolidation loans.
This is because the interest rates charged on these loans are normally much higher than you can get in the high street.
They often come with payment protection insurance with unfair terms, which may not cover you if you are made redundant or fall ill.
They are also "secured" loans, which means that if you are unable to keep up repayments you will lose the roof over your head.
If you are sure you want to consolidate your loans into one payment, you should shop around for a competitive rate on the High Street and get a normal unsecured personal loan.
People in debt should also avoid paying for so-called "debt counselling". There are plenty of free services available.
Should I save or pay off my debts?
A general rule is to pay off your debts, such as your mortgage and credit card, before you start to save money.
This is because the amount of savings income you can get is almost always dwarfed by credit rates.
To check whether you are better off saving or paying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.
You should factor in tax at 20% for basic-rate and 40% for high-rate taxpayers on top of the credit rate. If you are unable to earn savings or investment income above this level you should pay your debts first.
For example, a basic-rate taxpayer would have to find a savings account returning 38.37% to make saving more worthwhile than paying off a debt on a store chard charging 30.7%.
And, assuming a standard variable rate of 7.5%, a higher rate taxpayer would need to find a savings account paying 12.5% gross or 9.38% for a basic-rate taxpayer - for it to be more profitable investing the money.
Interest rates are so low at the moment, you should pay off as much of your mortgage as you can.
You should check with your mortgage company that you will not be penalised for overpaying.
I've spent too much. What do I do?
Your debt will not go away, you must tackle the problem before it escalates out of control.
Debt can be enormously stressful, so it is important to tell someone.
If you can not tell a member of your family, there are a number of charities who can help you cope with the stress and help you work out a debt management strategy.
You should then sit down and prioritise your responsibilities.
For example, meeting repayments on essential services such as your mortgage and utility bills should be your first concern.
If you are paying off a range of credit cards and store cards, you should pay off those with the highest rate of interest first.
You could also switch your balance to a credit card which charges a lower rate of interest - there are many providers of these special "balance transfer" deals.
Despite what you may think, most companies are sympathetic to people who cannot afford repayments.
Recovering debt can be enormously expensive, so they are often willing to work out an agreement with you.
Is there anyone who can help me?
There are a number of free advice services to help you manage your debts.
Try Consumer Credit Counselling Service (0800 1381111), National Debtline (0808 8084000) or the National Association of Citizens Advice Bureaux (020 7833 2181).
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