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Just when you thought the festive season was over, there's the sound of another credit statement hitting the doormat to remind you it isn't. Then another.
For those not able to pay off their credit card bills within a comfortable period, one possibility is to consolidate them into an unsecured personal loan.
Banks promote them at this time of year. The interest rate will often be lower than those on credit cards. Several lenders are charging an annual percentage rate, or APR, of under 10 per cent (see Databank, page 18).
By agreeing to pay off a certain amount each month for a specified period, a personal loan can help people to know where they stand.
To repay £1,000 to the Nationwide building society over a year on its 9.8 per cent deal (without payment protection insurance) would cost £87.63 a month, while £5,000 over three years would cost £159.05 with Northern Rock (see table).
But according to Phil Stone, of the Independent Debt Consultancy, based in Croydon, south London, paying off credit card bills like this should carry a warning. 'If you had a drink problem would you ask the bartender for advice?' he asks.
Mark Penston, regional director of independent financial adviser Inter- Alliance, points out that consolidation changes the debt from a short-term one with high interest to a longer-term one with lower interest.
'The total interest you end up paying is a damn sight more than paying off the credit card and taking the short-term hit,' he says.
And he warns that often you can't get out of it early without penalties.
Stone says: 'Our general advice is, don't borrow your way out of trouble.'
He acknowledges that 'most people with properties in the south of England are totally solvent' and could raise money by re-mortgaging their homes.
But he warns: 'The average person with more than £3,000 to £4,000 on credit cards, or regularly owing a third of their credit limit, has a problem.'
Though Stone accepts that 'consolidation can sometimes be worthwhile if we can seriously reduce interest rates', too often people choosing that way out fail to deal with the basic question: 'Why did the debt arise?'
He believes people take loans because they are spending beyond their means. 'Consolidation can work, but only if you don't suffer from human nature - if you don't have to use credit,' he says.
Paying off your credit cards by taking out a consolidated personal loan may save £20 or £30 a month, but it only works if you are not going to borrow any more, says Stone. 'But unexpected things happen to us all, so this is difficult for 99 per cent of the population.'
Stone advises:
• Rather than go for a personal loan, first approach your credit card company. It may agree to freeze the interest on what your owe for a couple of months.
• If you can, consolidate your debts in your mortgage. It's generally much cheaper.
• All unsecured personal loans take far more of your early repayments in interest than later on. Typically, with payment protection insurance, borrowing £10,000 means you owe £18,000. Payment protection insurance is expensive, and there are loopholes to help insurers to avoid paying out. Paying off early can attract penalties.
• Always check before taking out a loan what higher rate of interest you may be charged if you fall behind with your repayments. If you do take a personal loan tear up your cards.
• Be realistic about how much you can repay on a fresh loan. Allow at least £40 a month for unforeseen bills. Otherwise you may be forced to borrow yet more and your debts will increase.
• If you have consolidated loans and ongoing credit card debts, pay the loan, and use any extra money to pay off your dearest card. Make at least the minimum payments on your cheaper cards.
• Work out monthly how much you owe. If the total keeps on rising, get advice.
The experience of Terry Lucas, a London postal worker, shows the dangers of trying to borrow your way out of trouble.
Lucas took an unsecured personal loan of £10,000 to help a member of his family, but the repayments left him short of money each month. His bank extended his loan by £5,000. He was now repaying £380 from his £1,100 salary, and funding the rest of his outgoings on seven credit cards. 'Robbing Peter to pay Paul was making me ill,' says Lucas, not his real name.
But there was no going back. He took another personal loan, this time for £3,000, in a vain attempt to pay off his cards. A further £5,000 offered by an eager lender - aimed at paying off the first loan and his cards - led to further trouble.
'I saw the personal loans as a short-term fix, but I never got more than a year and a half into the repayment period before I had to borrow a bigger amount to pay off my credit cards,' he says.
Over six or seven years, £10,000 had grown to £23,000. He was now paying more than £600 a month simply to pay off his personal loans, and £200 to repay his card debts. With interest his debts had risen to more than £67,000.
'I was left with just £200 a month to live on. I was digging a bigger and bigger hole all the time,' he adds.
Detox for debt junkies
The Consumer Credit Counselling Service dealt
with 70,000 cases last year. Clients agree a
repayment schedule with the service , which
distributes payments among the client's creditors.
CCCS's debt counselling programme is funded by
lenders.
Sorting out serious debt can be a long slog;
repayment typically takes six to eight years to
complete and some clients are repaying debt for
up to 10 years. The message from people helped
by CCCS is to tackle debt before it tackles you.
Among clients so far assisted by the service are:
Vicky, 28, works as a personal assistant for a large
City firm with a salary of ?28,000. She lives at home
with her mother, to whom she pays ?250 per month,
leaving her with a high disposable income. Working
with high-spending colleagues, Vicky got a taste for
designer clothes, travel and socialising and soon had
debts of more than ?25,000. She sought help when
she could barely cope with the minimum repayments
and was seriously overdrawn.
Ken, 39, is a manager and married with two children.
He has an income of ?38,000 and his wife gave up
work before their second child was born. For more than
10 years Ken had taken out loans and ran up bills on
his numerous credit cards. He now has debts of about
?150,000, of which his wife knows nothing.
Dawn, 40, is an administrator and a single parent with
a son of 9 nine and a daughter of 13. After 16 years in
a secure job with a salary of ?20,000 per year, Dawn
was made redundant in 1997. After six months of
searching for a job, she was still unemployed and had
to accept a job with an ?8,000 per year drop in pay. If
she had refused to take the job her benefit would have
been cut and her rent and council tax would no longer
be paid. Dawn had debts of ?6,000, which eventually
became unmanageable.
James, 38, got into difficulty after a relationship broke
down. James and his partner had used credit to furnish
their home but when the relationship broke up James's
partner took the furniture, although the debts were in
his name. James had a nervous breakdown and spent
18 months off work, using his credit cards to help pay
for living expenses. When he returned to work, he had
debts of more than ?15,000. He asked the bank for a
loan but it refused and referred James to CCCS.
Names have been changed.
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