Don't let debt drag you down

Britain's debts are at an all-time high. Low interest rates have encouraged us to borrow more: the Bank of England informed us in December that consumer debt had risen by its second highest level ever (the record was October) and is standing at its highest ever figure (?140bn).

The withdrawal of university grants and the introduction of fees mean that young people encounter and become accustomed to debt from a very early age. According to financial watchdog the financial services authority, one in five families has a credit card with an average debt of more than ?2,000, while one in seven has a personal loan averaging more than ?5,500. Mortgage lending is now nearly ?650bn (that's ?11,000 for every person in the country).

All of these statistics make very worrying reading, according to the financial services authority (FSA), which last month urged over-enthusiastic borrowers to rein in their spending, suggesting that if they don't, "this could cost them dearly in the long run". If, as many people fear, there is a rapid economic downturn - or even if interest rates just creep up slightly - Britain's borrowers could find themselves in serious trouble. But if you are in debt, don't worry: there are steps you can take to make inroads into it and pull yourself back into the black.

Cut out the caffeine
"If you're having debt problems, start by looking at your outgoings" says Rebekah Kearey, from specialist independent financial adviser, Roundhill Financial Management in Brighton. "Buy a notebook and take it everywhere, noting down everything you spend for a fortnight."

"You'll probably be amazed by how much you spend on non-essentials that you could cut out all together. For example, do you buy ready-meals or pre-prepared salads more than once a week? What about walking those three stops to work rather than catching the bus - you'll get some exercise and save on those magazines you needed for the journey. Just buying coffee from the local Starbuck's each morning might cost ?1 - or more - every day. Give it a miss and you've saved yourself more than ?200 a year without trying," she says.

Rebekah suggests you then add up the amount you owe (don't include your mortgage). If the total is over 20% of your annual pay after tax then you need to work hard to reduce your debt.

Get personal with your debt
Personal loans are relatively cheap. If you've a number of expensive debts, get a personal loan to pay them off and tear up all your credit cards. Don't just turn to your high street bank for a loan, chances are you will be able to get a cheaper loan elsewhere. Best buys at the moment, for example, include Northern Rock at 7.9% APR, loanone at 8.1% and Intelligent Finance at 8.3%.

Improve on your current situation
Overdrafts work out to be a very expensive way to borrow money; unauthorised overdraft rates, in particular, can be extortionate, generally at around 29% APR. Lloyds is expensive at 29.8%, Royal Bank of Scotland, Clydesdale Bank and NatWest charge more than 33%, but Citibank gives unauthorised borrowers the biggest shock of all: 41.2% EAR.

But more and more accounts are now offering free overdrafts. Smile and Citibank are most generous with ?500 free facilities. Authorised overdraft interest rates can be high. Lloyds TSB and NatWest are expensive at 17.3% and 17.8%. Instead check out what the internet banks have to offer. Cahoots, for instance, offers 7.0% for arranged overdrafts, Intelligent Finance, 8.39% and Smile 9.9%. Alternatively, move the debt from your overdraft to a low-cost credit card or loan and cancel your overdraft to avoid further temptation.

Most banks and building societies still offer free banking when you're in credit. So it's worth opting for a current account that pays interest on your balance. With the high street banks offering a paltry 0.1% on balances of ?1, you may be better looking at Smile, which pays 3.0% on ?1-plus on its current account.

Get wise with your plastic
Credit issuers are so keen to attract customers that some offer 0% interest for the first six or nine months. If you've got a card, switch to Tesco, or RBS Advanta, both charge 0% on balance transfers until October. Nationwide Building Society and Virgin Money offer 0% for the first six months on transfers.

"It's easy to find at least six months of credit," says Rebekah Kearey, "But be warned, you can make yourself uncreditworthy if you keep swapping to zero per cent credit card deals." She advises once you've paid off the card, try to live without it: "With Switch-type facilities available, credit cards are unnecessary and you will be able to budget far more easily," she says.

Cut up your store cards - these charge some of the highest interest rates. For instance, Timecard, which can be used in retailers including Comet, Woolworths and Next, clocks in at a staggering 29.9%, Monsoon blows in at 28.7% and Debenhams charges 28.0%. Move the debt to a low-cost credit card or loan.

Reduce your mortgage payments
If you've run up thousands of pounds of debt, you can remortgage your home. This involves cashing in your current loan and taking out a bigger mortgage.

"A mortgage is usual ly the biggest investment people make but very often they are paying over the odds because they don't realise how easy it is to remortgage," says Yvonne White at Coventry Building Society. "Speak to your existing lender to see if they can give you a better deal or by moving to another lender, it may be possible to reduce your monthly mortgage repayments so helping you pay off more of your other more expensive debts."

The best mortgage rates are typically below 5% - compared to about 8% or 9% for credit cards and personal loans. Check out the best mortgage deals at Charcoal online, the FSA and Moneyfacts. Coventry Building Society has a mortgage calculator on its website so you can work out if you can save money by switching lenders.

If you're having difficulty making in-roads with your debt, don't start hiding the bills. Rebekah Kearey advises, "Don't ignore the problem. Contact the financial companies you owe money to as soon as you start to have a repaying problem. They'll usually be accommodating if you go to them and tell them your situation and you should be able to come to an arrangement."

Avoid the sharks
Don't ever take out a loan from an unscrupulous loan company, especially those that target less-well-of people and collect repayments door-to-door, and charge rip-off rates of interest. Their customers are often people who are already in debt who are encouraged to take out a single loan to get all their other creditors off their back. You could end up with an interest rate of several hundred per cent. Steer well clear.

Get help
There are a number of free services that will help. Try the National Debtline, The Consumer Credit Counselling Service or the National Association of Citizens Advice Bureaux. A debt adviser will take an overview of your problems and work with you and your creditors to put a realistic repayment plan in place. Many credit card companies and financial firms will agree to a small regular payment once they have been told about your changed circumstances.