Don't wait to be engulfed by your debts

The City watchdog, the Financial Services Authority (FSA), last week published further evidence that Britain is becoming a nation of debtors. Its new survey reports that one in five families has a credit card with an average debt of more than £2,000. That figure, bad as it is, is still not the whole picture: families often have more than one credit card, and many people have several debts including loans and overdrafts.

The real debt problem in this country is much more severe. According to figures from the FSA, British consumers owe £155bn in unsecured (non-mortgage) debt, which averages out at about £5,000 per household. And the Consumer Credit Counselling Service, a charity that helps people with chronic debts, recently reported that its clients owed on average £24,000 each.

Most of us find our monthly debt repayments quite manageable, but experts warn that just a small rise in interest rates and/or an increase in unemployment could cause a debt explosion. Government figures suggest that 7 per cent of the population are living on a knife edge, juggling their debts and liable to get into major problems at any moment.

"Just a few per cent on interest rates could spell financial misery for thousands," says Peter Sargent from the Association of Business Recovery Professionals. "Credit card and store card debt is particularly high. Low minimum payments mean many people fail to realise just how far into debt they've fallen." The FSA's report estimates that 10 per cent of our spending is financed by debt.

Citizens Advice Bureaux (CAB) report a 37 per cent jump in the number of enquiries they've received about consumer credit over the last two years. The size of the average county court judgment increased from £865 in 1996 to £1,300 in 2000. And half the adult population have debts they cannot repay in four months (a figure that excludes mortgage borrowing and rises to 65 per cent among the 25 to 34 age group), according to research conducted by the CPP Group.

In a free booklet entitled "You and Your Money ­ Taking Control", the FSA offers the following advice to those struggling with debt problems:

* Budget to bring down outgoings and put all savings into paying off the debt.

* Prioritise debts to identify the most urgent (mortgage, Council Tax, utilities).

* Negotiate manageable repayment deals with creditors.

"Work out which debt has the most expensive annual percentage rate [APR]," says Bruce Jackson, managing director of The Motley Fool financial website, which has its own "Get Out of Debt" section. "Then pay the minimum each month on all your other debts while throwing as much money as possible at the most expensive one. Once you've paid that off, put the extra amount of money into the next most expensive, and so on." He also recommends that people consolidate their debt by transferring credit and store card balances on to one low-rate credit card.

Websites such as Moneysupermarket.com, which compares different financial products, provide an easy way to source the best deals on credit cards and personal loans. Those with the self-discipline to take out a low-rate credit card to clear their debt, and not add to it by spending more, can benefit from one of the many interest-free deals currently available.

Providers including RBS Advanta, Egg, Virgin, Marbles and Abbey National are offering introductory periods at 0 per cent interest. The catch is, when these offers come to an end, the interest leaps up. (Abbey National's standard APR, for example, is 15.9 per cent.) "For anyone likely to pay off their balance within the interest-free period, it makes sense to switch, especially for those with store cards [as the rate of interest they charge is usually between 25 and 30 per cent]," says Stuart Glendinning at Money-supermarket.com.

But if you won't be able to clear your debt within the introductory period, opting for a personal loan may be a better idea. It can also be helpful to transfer other debts such as hire purchase or expensive overdrafts to a cheap loan deal. Liverpool Victoria has reduced its personal loan rate to 6.8 per cent for sums between £5,000 and £25,000. Lombard Direct and Northern Rock charge 6.9 per cent and Cahoot's loans start from 7 per cent, although the rate you get depends on your personal credit score.

Never go to a debt counselling company that charges a fee for its services. That money would be far better used paying off the debts, and you can get the same service for free from the CAB. Or try other free services like National Debtline or the Consumer Credit Counselling Service. Some debtors who have used management companies have found their problems made worse rather than better. Undercover investigators from the Consumers' Association recently tested seven leading debt management firms. They found that all failed to meet guidelines set down by the Office of Fair Trading in one or more ways. In one instance the charges quoted were larger than the debt repayments.

Contact: Consumer Credit Counselling Service, 0800 138 1111; National Debtline, 0808 808 4000; Moneysupermarket, www.moneysupermarket.com; The Motley Fool, www.fool.co.uk