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Last Updated: Thursday, 29 July 2004, 07:51 GMT 08:51 UK
Q&A: Dealing with debt
The amount of money owed by consumers has broken through the 1 trillion barrier for the first time. BBC News Online offers some guidance for people who are worried about debt.

I've spent too much. What should I do?

The simple answer is do not bury your head in the sand - debt does not go away.

It is important to deal with the problem before it escalates out of control.

Confide in someone, a friend or family member - and then act on sorting out the debt.

I am in debt. Will my lender get nasty?

It is important to act promptly and talk to your lender.

Consolidation loans seem like a tempting "quick-fix" solution, but charities warn they could damage your finances further

Most companies are sympathetic to people who cannot afford repayments, as recovering debt can be enormously expensive for finance companies.

They are often willing to work out an agreement with you, as long as you keep them informed.

Should I pay for advice?

Charity-based debt counsellors advise people to steer clear of agencies that charge for advice.

Debt management firms will charge for drawing up a tailored debt management plan and this can eat into precious resources at a time you need to be watching every penny.

This is because there are services that can help you manage your debts free of charge.

National Debtline: A free, confidential and independent service funded by the Department of Trade and Industry and the credit industry. Tel: 0808 808 4000
Business Debtline: Provides a free telephone debt counselling service for self-employed and small businesses, funded by banks. Tel: 0800 197 6026
Consumer Credit Counselling Service: Funded entirely by the credit industry, the service offers advice to people in debt. Tel: 0800 138 1111
Citizens Advice: Offers free, independent and confidential advice from more than 700 locations throughout the UK. Tel: 0207 833 2181

They will also help you cope with any psychological pressure you may be under, because of being in debt.

Should I take out a consolidation loan?

Consolidation loans seem like a tempting "quick-fix" solution, but charities warn they could damage your finances further.

The idea is that multiple debts will be more simple if they are "consolidated" into one repayment.

This may seem like a dream for the debt-weary, but debt counsellors advise people to steer well clear of them.

Interest rates charged on these loans are normally much higher than those available on the High Street.

They often come with payment protection insurance with unfair terms which may not cover you if you fall ill or are made redundant.

They also tend to be "secured" loans.

This means that if you are unable to keep up repayments you will lose the roof over your head.

What bills should I prioritise?

Debt experts advise people to prioritise repayments on essential services such as mortgages and utility bills.

The golden rule is those debts that if left unpaid could result in you losing your home or being taken to court, such as council tax, should always come first.

Defaulting on a debt to a credit card firm or catalogue company could result in a damaged credit rating but it should not put your home at risk.

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.

Should I be saving or paying off debts?

A general rule is to pay off your debts, for example your mortgage and credit card, before you start saving.

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 any tax that you may incur on your savings - at 20% for basic-rate and 40% for high-rate taxpayers.

However, independent financial advisers (IFAs) argue that it is a wise move to have between 3 and 6 months salary saved in a deposit account which can act as a useful cushion should you lose your job or become too ill to work.

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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