Page last updated at 14:46 GMT, Wednesday, 3 January 2007

Q&A: How to manage debt

A woman under stress
Being in debt can lead to stress and depression
Britons have taken on record levels of mortgage and credit card debt, causing concern that people could be heading for a nasty fall. What steps can you take to avoid getting into debt? And, if you are already in the red and worried about coping, how can you repair the damage?

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.

What rate should I be paying on my credit card?

Most people pay over the odds for credit, but there is no need.

There are a range of good deals on the market, offering rates of interest only a little higher than the Bank of England base rate at 5%.

But many customers pay close to 20%.

In fact, relative to the Bank of England, some big-name credit cards have never been more expensive.

If you opt for a card that 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 of thumb 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.

Should I consolidate my debt in a loan?

Consolidation loan companies 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.

This is because the interest rates charged on these loans are normally much higher than you can get on 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 interest rates you pay on your debts.

To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.

You should also factor in tax that you will have to pay on your savings - at 20% for basic-rate and 40% for high-rate taxpayers.

At the moment with interest rates at historically low levels, it is probably better to pay off your debts.

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 Citizens Advice ( for advice or to find local bureau).

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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