Avoiding the pitfalls of borrowing

1) Regard credit as something to be used sparingly and with care. Remember that if you miss a month's payments you could be in serious trouble and damage a credit rating you have taken years to build up.

Without an acceptable rating, according to Laurence Baxter of Which?, you can end up "almost barred from much of society".

2) If you want to borrow money, face the fact that it costs. If you do decide it is essential, be sure to use the right kind of borrowing for your purpose.

For a small debt, for example, you might want to use a short-term overdraft, whereas borrowing more over a longer period might justify a loan or a credit card if the terms are appropriate. Determine what your needs are before you set foot in a bank or talk to a credit company.

3) Remember that decisions on credit should be based not on the sum involved but on the amount relative to your income.

The Consumer Credit Counselling Service (CCCS) cautions against becoming over-extended, which it defines as paying out more than 20% of your net income each month on debts excluding your mortgage.

4) If you are already in debt, remember that the Citizens Advice Bureaux and the CCCS are not only for people on low incomes.

If you see warning signs such as having to take out credit to repay other credit, or if you are only making minimum payments on debts, don't bury your head in the sand: seek advice before the problem escalates out of control.

5) If you get into serious debt, creditors won't accept a repayment plan unless you have clearly cut back on extravagances such as expensive gym membership or luxury holidays.

Sitting down and budgeting takes time, and may be boring and depressing, but you have to face up to it.

6) If your financial circumstances change dramatically, for example as a result of separation or divorce, you should seek independent financial advice from one of the free services on offer. Talk to them first before you contact your bank.

Contacts

Citizens Advice - provides free, impartial and holistic debt advice. Visit www.citizensadvice.org.uk to find your nearest branch.

CCCS - a charity funded by the financial services industry. Call 0800 138 1111 or visit www.cccs.co.uk.

National Debtline - free telephone-based information and advice. Call 0808 808 4000.