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Anyone who has made money on a house financed by a mortgage knows that debt does not need to be a dirty word. Many economists believe that even though we now owe £1 trillion, the economy would have to take a severe jolt for this level of debt to become unmanageable. But it is clear from the rising number of people seeking help from debt-advice charities that a significant minority of people are struggling. In an environment where it is easy to borrow, it is vital to know how to stay in control:
Learn to tell good debt from bad
A mortgage is probably the least undesirable form of debt, says writer and broadcaster Paul Lewis in his book Managing Your Money (Age Concern Books, £6.99).
'Although we have the debt we also have an asset worth at least as much and which normally goes up in value. In extreme circumstances, we can use it to pay the debt off.
'Short-term debts that simply brings spending forward a few months - say up to a year - can also be good debt. 'A golden rule is that you should never pay for something over a much longer period that it it is used for.'
Keith Tondeur, national director of charity Credit Action, is more specific: 'If it is going to take you longer than three months to pay off the interest on credit or store card, think again.'
Have a clear repayment strategy
If you want to clear credit card debts, switch borrowing to a zero per cent card and pay off as much as you can before the interest-free period expires. Then move on. If you cannot get an interest-free card, do a bud get and concentrate on repaying the cards with the highest rates. Only use a consolidation loan if you save money on interest and do not take out any further credit while you are repaying the loan.
There is concern in the lending industry and among financial advisers that an increasing number of homeowners do not have strategies to pay off mortgage debt. Approximately three per cent of outstanding loans in England have been taken out as interest-only arrangements, according to a recent government survey. Among the 236,000 borrowers with interest-only loans, 14,000 households had no specific plan for repayment. There is also concern that older people are heading into retirement with significant debts. Financial adviser Key Retirement Solutions says that 14 per cent of retired homeowners have oustanding mortgages.
Know how you would cope in an emergency
Lenders sell insurance aggressively on the premise that it can be used to keep up repayments during illness or unemployment. But this adds significantly to the cost of borrowing and may be unnecessary if you know, for example, that your employer has a sick pay scheme that would protect your income for a reasonable period of illness.
Alternatively, you may know that there are economies you could make to keep up debt repayments. The smaller your debts the less likely it is that you will be destabilised.
Get the best deals
Personal loans are cheap at present and there are still many short-term 0 per cent deals available on credit cards. Unless you have a poor credit rating, there is no excuse to be paying interest at 20 per cent or more on a credit or store card. If you are paying the standard variable rate on a mortgage - about 6.5 per cent - you will almost certainly save money by switching.
Don't make debt a lifelong habit
In future, the labour market and increased longevity will demand flexible working patterns and changes in career. The more debt you have, the less room for manoeuvre if you want to change jobs or take a career break.
Know what to do if it all gets too much
If you cannot keep up payments on loans and essential bills are going unpaid, you need help. Beware fee-charging debt advice services. They are unregulated and their tactics have been controversial. You may be able to sort out a crisis plan yourself.
A new book, Forget Debt in 90 Minutes , by Graham Willmott, £9.99 (from bookshops and www.forgetdebt.net) includes draft letters to help you negotiate repayments. And there are several charities that offer debt counselling: www.creditaction.org.uk; National Debtline, 0808 808 4000; Business Debtline, 0800 197 6026; Consumer Credit Counselling Service, 0800 138 1111; Citizens Advice Bureaux, 020 7833 2181.
Do you have a debt problem?
Green for go: Your debts are manageable
· Less than a third of your monthly pay goes in paying off debts, or a quarter if you don't have a mortgage.
· You have only one credit card and manage to pay a large chunk of it off each month. Sometimes you may not even owe any cash on it at all.
· You always have money left at the end of the month, even if it's just £20.
· You have a long-term savings goal and put some cash by each month.
Amber: Go easy
· You keep taking out credit cards to pay other ones off.
· Some months you run out of money.
· You often have to borrow cash from friends and family.
· You often hit your overdraft limit.
· You are a sporadic saver and sometimes dip into your savings.
· You have a long-term savings plan only when you're drunk, but you forget about it in the morning.
Red: Stop - your debts are out of control
· You can't open bank statements, because you're too scared to look.
· You lie to your partner about how much you earn/owe.
· You're putting essentials on your credit card even though you earn more than £40,000 a year.
· You've got a string of cards and loans and they are all up to their limit.
· You can't remember what cash looks like.
· From Money, the Virgin Guide by Samantha Downes, published by Virgin Books, £7.99
What we owe
To banks £655,366,000,000
To building societies £149,787,000,000
To other specialist lenders £183,383,000,000
To retailers £2,100,000,000
To others £3,126,000,000
Total £993,359,000,000
· As of May 2004. Source: Bank of England. Figures not exact due to rounding
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