Are you living in a debt dreamland?

Mortgages: <br/>Record &pound;27.5bn of borrowing at end of October. <br/>Home loan rates are up and could rise again. <br/><br/>Spending: <br/>More than half of us feel pressured to spend more than we should at Christmas. <br/>A quarter of us do. <br/><br/>Borrowing: <br/>One in five of us are facing the debt precipice. <br/>One in four do not know how much we owe.
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The Independent Online

The fairy lights are twinkling, the mulled wine pours freely and the children are laughing happily. It is easy to live in debt dreamland. But at the last count, total UK consumer credit debt was £168bn, with the average owed by each household £6,800. Add record levels of mortgage borrowing, at £27.5bn by the end of October, and many of us may be jerked from that debt dreamland to a debt nightmare.

The fairy lights are twinkling, the mulled wine pours freely and the children are laughing happily. It is easy to live in debt dreamland. But at the last count, total UK consumer credit debt was £168bn, with the average owed by each household £6,800. Add record levels of mortgage borrowing, at £27.5bn by the end of October, and many of us may be jerked from that debt dreamland to a debt nightmare.

The pressure to live for today and forget about how to pay seems overwhelming at Christmas. More than half of us feel we should spend more than we should at Christmas and 25 per cent actually do, shows a study by the insurer, Royal London. But with interest rates creeping up, mortgage repayments are rising, and leaving other debts to pile up could become more dangerous in the new year.

Brian Dennehy, managing director at independent financial adviser, Dennehy Weller, says: "Many consumers are living under a debt illusion and, unfortunately, at this time of year people get more and more out of touch with the reality of dealing with the longer-term consequences of spending."

In fact, it is estimated nearly one in four of us do not know how much we owe and it looks as if this proportion could increase. Janice Allen, spokes-woman for the consumer campaigning body, the National Consumer Council, says: "The recent rise in interest rates was a wake-up call for the one in five people on the edge of the debt precipice. Now is the time to change our spending habits, reassess our budgets and live within our means."

The Office of Fair Trading (OFT) this week launched a drive to help families do just this. It wants those in debt to think about solutions to their problems, rather than borrowing more to pay off their debts and hope the problem will go away. Penny Boys, executive director at the OFT, says: "Coping with debt early is the key to avoiding serious problems. You should act as soon as the bills start to mount or payments on credit agreements are missed. Don't bury your head in the sand."

Lynda and Keith Pearce-Hicks have dodged the debt trap by remortgaging to a competitive 3.5 per cent two year fixed rate mortgage with CIS and releasing enough cash to pay off all their other existing debts in the process.

Lynda, 48, who runs Ivy Bank Swim School in Prestwich, Manchester, and Keith, 39, a builder, are self-employed. This meant on top of all the usual consumer debt such as credit cards, the couple had business loans.

They also wanted cash for home improvements, but wanted to avoid high-interest personal loans. Mrs Pearce-Hicks says: "They are a lot more expensive, but after 12 years in our home we really needed to do work on it so we went for a remortgage. This means we have paid everything off and, because we have a better rate, our repayments aren't much bigger than our last mortgage. We still have leeway to make overpayments and save more into our Isas."

Certain groups of society are more likely to fall into the debt trap than others. Ms Allen says: "People on low incomes are particularly at risk from higher interest charges. Not only do they have extra-tight budgets but they often have to pay more for credit."

The Consumer Credit Counselling Service (CCCS) says debt-to-income ratios are consistent across the UK, but people in London and surrounding areas, where rent and mortgage repayments take up a greater proportion of income, are more likely to call its helpline.

More of the CCCS clients call from inner-city areas and, curiously, military barracks towns. This, it says, is because credit card companies target areas where there are plenty of borrowers with regular incomes.

If you are among those struggling with debt, there are still ways you can avoid the worst consequences of the debt trap by prioritising your debts. The most urgent ones are not always the largest, or those with the highest interest; priority ones are to creditors who can take the strongest legal action against you if you do not pay. Failing to meet your mortgage repayments can mean court action for possession of your home, and landlords can evict tenants in rent arrears.

Not paying your income tax or VAT can mean bankruptcy or imprisonment, and if you fail to pay fines, such as for traffic offences, the court can use bailiffs to repossess your goods. If, after this, you still have arrears you can be jailed. The same applies for maintenance, child support or, council tax or rates. If you have any of these priority debts, deal with them before you offer to repay debts such as credit-card and store card arrears, overdrafts and loans.

You cannot be imprisoned for not paying non-priority debts. But if you make no offers to pay, without explaining why, the creditors will take you to court and the bailiffs may call.

If you have only non-priority debts, concentrate on those with the highest interest charges. For example, store cards are among the highest rates of consumer borrowing products, with rates up to about 30 per cent.

The product comparison website www.moneysupermarket.com shows there are nearly 50 credit cards offering 0 per cent on balance transfers. Borrowers can switch expensive credit, store card and bank overdraft debt to these deals, avoid interest and use this saving to start paying off the capital of their borrowings.

If your credit cards take a hammering this Christmas and you think you might struggle meeting repayments come the new year, you can still make life easier, even in these testing circumstances.

Talk to creditors before you get into serious trouble; it is in their interest and yours to work out a new repayment schedule sooner rather than later. Also remember there places to turn to for free and impartial advice.

THE SIGNS YOU SHOULD NOT IGNORE

Payplan, the free debt advice service, lists 10 warning signs:

* After you have paid creditors and a few basic expenses, there is not enough money to survive the month/week;

* You drastically cut back on basic necessities such as food or travel to pay creditors;

* You consolidate personal loans and credit card debts more than once in five years;

* Without overtime or benefits, you would not be able to pay creditors;

* You use credit cards or borrow more to pay creditors or for basic expenses because your pay cannot cover them;

* If a minor financial emergency happened, say, your fridge broke down, you would not be able to afford to fix it without borrowing;

* You regularly exceed your overdraft to an extent that you are not in credit when your wages are paid into the bank;

* Your bank is in regular contact about unpaid direct debits, personal loans arrears and your use of an unauthorised overdraft;

* You have mortgage, utility or council tax debts;

* Your financial situation starts to drastically affect your life, say, loss of sleep, family money arguments or you cannot concentrate at work.

For debt advice: The OFT has a debt pocket guide 'In debt? Help yourself out!'. PO Box 366, Hayes UB3 1XB 0800 328 9382 www.oft.org.uk.

Citizens Advice Bureaux www.citizensadvice.org.uk

National Debtline 0808 808 4000 www.nationaldebtline.co.uk

Consumer Credit Counselling Service 0800 138111 www.cccs.co.uk

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