How to kick your debt habit

If you are trying to get your finances on a firm footing, you won't get far if you are struggling with debt. A credit card habit is enough to ensure you make little headway towards exploiting every penny you earn, even if your income is relatively high.

As a nation we owe nearly £2,000 on credit cards and loans for every man, woman and child. People seeking help with debt from counsellors with the Consumer Credit Counselling Service (C CCS), owe an average of £25,000 to banks, credit card operators and other 'consumer' lenders. Nearly half of them have mortgages as well.

Citizens' Advice Bureaux dealt with nearly 600,000 cases involving consumer debt in its last financial year, a rise of 16 per cent over the previous year. The caseload increased by 37 per cent over two years.

Debt counsellors wereonce called in mainly when borrowers experienced a change in circumstances, such as divorce or redundancy. But policy officer Sue Edwards says: 'We are getting a lot of CABs telling us that people are seeking advice because they have taken out too much credit.'

Edwards is convinced that people are getting into difficulty partly because they they do not understand the traps involved in credit card marketing, such as low introductory rates that rise substantially after the introductory period has ended.

The Government has sympathy for this view and wants to know whether lenders are doling out debt too easily. The Department of Trade and Industry called lenders to a 'summit' before Christmas, and the industry is now reviewing its practices.

In a separate Government initiative last week, the Treasury published proposals to issue seals of approval, or Catmarks, for credit cards that meet minimum criteria for terms and charges (see page 6).

Malcolm Hurlston, who helped to found the CCCS, says his service is also dealing with an increasing workload, but he does not believe that credit is too easy to get. He argues that, while we spent 16.6 per cent more on credit cards during December - a total of £8.4 billion - the average proportion of balances that were being charged interest was down significantly in the first 11 months of 2000, from 77.8 per cent to to 74.1 per cent.

This is an indication that more people are paying off what they owe before they are charged interest and that borrowers have their debts under control.

But Hurlston accepts that some groups are vulnerable. The CCCS is seeing an increasing number of young people, and he believes twentysomethings are coming unstuck through losing their jobs. 'People are getting indebted in their twenties and counting on working.'

Many start their working lives with student loans and overdrafts. another problem, he says, is that people make minimum payments on credit cards and fool themselves that they are coping.

Getting debt under control:

Debt problems come in degrees. Despite the frightening numbers of people seeking help and the alarming sums of money they owe, most people manage their debts without difficulty.

For many, the problem is that keeping up payments becomes a drag on finances. The difficulty with credit cards, in particular, is that they lull us into a false sense of security, and if you lose your job, you may find that a small debt becomes a big problem. Lenders also have ploys to ensure you pay as much in interest and charges as possible, such as small minimum repayment levels, and charges for late payment.

Here's how to tackle your debts:

Step 1: Construct a budget. Look at how much you really spend, right down to coffees, dry cleaning and haircuts, to see where savings can be made.

Edwards asks: 'Can you increase your income and decrease expenditure?'

If you are on a very low income and at least partly dependent on benefits, you may need specialist welfare or debt advice from a CAB to see if you are claiming all the benefits to which you are entitled. The social security system has changed dramatically under the present Government, with the arrival of working families' tax credit and other new benefits and you may find you are entitled to something you are not receiving.

Step 2: Pay the bills that will keep you housed, fed and reasonably warm such as your mortgage or rent, council tax, gas and electricity.

Then put your consumer debts into order of priority, concentrating first on clearing those with the highest rates of interest.

A store credit card may be costing nearly 30 per cent a year, and a Barclaycard more than 19 per cent, but student loans are currently being charged at 2.6 per cent. This might mean that you make a student loan the last to be paid off.

You may need to negotiate with banks or card companies over loans (see next step).

Step 3: Assess your situation. If your budget reveals that you do not have enough spare cash to make serious inroads into your debt, or that you cannot even keep up minimum payments, consider asking lenders to reduce payments or freeze interest.

Edwards says borrowers can negotiate deals for themselves, but adds: 'Some banks and building societies certainly do take people more seriously if they come through a CAB.' If you do negotiate lowered repayments, be aware that this is likely to have an effect on your credit record.

Step 4: Decide whether you need specialist debt advice. Edwards says you probably need outside help if you are using one credit card to pay another, if your overdraft is increasing every month and if you are using credit cards to buy essential food on a regular basis. Another signal that you need help is if you are in difficulty with 'priority' debts such as mortgage arrears or council tax.

A new industry has grown up over the last three years offering fee-paying debt advice. Several companies advertise these services, often offering to reduce monthly outgoings on debt. These debt management services will negotiate payments to lenders and ask you for a monthly contribution. The debt manager takes a fee of typically 15 per cent and distributes the balance to creditors.

Edwards and other debt counsellors are sceptical about them. In some cases administrative errors have resulted in money not being passed on to lenders for months, damaging people's credit records. There are also concerns about the level of fees. Free advice is available from CABs, the Consumer Credit Counselling Service and National Debtline (details at end of article).

Step 5: If your problem can be solved with a bit of tight budgeting, look first at sav ings or investments that you could use to repay debt. You may want to keep some money in a savings account for emergencies, but investments need to be earning huge returns to outstrip what you would save by paying off debt.

If there is no spare cash, look at whether you can cut interest paid on your cards. For people without a serious debt problem, but who want to clear borrowings, this is one of the best ways to tackle the job.

You may be able to switch cards, and transfer existing debt, to a cheaper deal - possibly paying no interest at all for a period (see table). Cheap debt transfer rates normally apply only for a certain period of time. You need to be prepared to switch any unpaid debt to another cheap rate on expiry of the deal.

Another note of caution: If you don't stop borrowing and cut up your old cards after switching, you will not get out of debt.

Pay card bills before the due payment date. Unless they are paid in full each month, lenders charge interest from the date a transaction hits the account, so the longer debt remains on an account, the more interest you pay. The sooner a payment hits an account, the less you will pay in total.

Consider debt consolidation: a cheap loan to replace a variety of expensive debts, but only as a last resort (see article overleaf).

Step 6: Set yourself a target for getting the debt paid off. When you're debt free, try to repay card debts in full each month. Most people need to borrow from time to time so watch out for cheap credit cards and loans in future.

Danger signs

Do you:

? Have more than two cards and rising balances?

? Pay just the monthly minimum for each card?

? Have longstanding store card debt (at 30 per cent
interest)?

? Borrow from one source to pay off another debt?

? Have trouble paying for essentials - mortgage, bills,
food?

? Have loans taken out to repay other debts, thereby
accumulating more borrowing?

? Regularly miss loan repayments?

? Regularly pay for food with credit cards?

? Face legal action by lenders?

? Put off opening bills?

? Row with a partner over debts?

Consumer Credit Counselling: 0800 138 1111
National Debtline: 0645 500 511
Citizens Advice Bureaux: see local phone books