Don't dump all those debts into one basket

Many of you will have seen the adverts for "debt consolidation" firms on television. Whatever firm is featured, they all have one thing in common: a smiling man in a suit offering to take all your myriad overdraft and credit card debts and simplify them into "one affordable monthly payment."

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Many of you will have seen the adverts for "debt consolidation" firms on television. Whatever firm is featured, they all have one thing in common: a smiling man in a suit offering to take all your myriad overdraft and credit card debts and simplify them into "one affordable monthly payment."

The confident chap may or may not mention that you also have to own your own home to avail yourself of their services. This may instead be flashed up on screen at the end of the ad. For people who are worried about their debts, these are seductive images.

Certainly, debt management has never been more important. With the explosion of competition in the high street and over the internet for every form of credit in recent years has come a huge increase in people losing control of debts. Most of us know someone who has "put too much on their plastic".

Yet people who are suffering from debt problems would be much better advised talking to an ordinary bank manager, an independent financial adviser (IFA) or someone at a Citizens' Advice Bureau to get themselves sorted out. Going to one of these debt-management firms and consolidating all your debts into one payment will not necessarily ease your burden.

For a start, the reason such services are limited to people who own their own homes is simple. The idea is to switch your borrowing from your credit cards and bank accounts into one lump sum added onto your existing mortgage.

The sales patter can be attractive. After all, mortgage rates are at 30-year lows, ranging from 7 per cent down to around 4 per cent for some deals. This compares to overdraft rates from the big high street banks that still average around 18 per cent. Credit cards from the same institutions have cut rates in response to intense competition recently, but you can still be caught paying over 20 per cent.

If you exceed your credit limit on either a credit card or an overdraft the interest rates and charges can be penal. The big banks mostly charge over 30 per cent plus fees for an unauthorised overdraft. Shifting this debt onto your mortgage can look like a good idea.

This is not necessarily the best answer, however. Think of borrowing as working for the bank or institution you are borrowing from. To imagine that extending the life of your mortgage is somehow a pain-free option is an illusion.

It just means that you are adding years to your sentence slaving away for the bank. The interest on those extra years of the mortgage is new, extra cash that you will have to come up with. Much of these debt consolidation deals are simply putting off the evil day when you will have to look seriously at your spending.

And there is one very nasty sting in the tail to many such deals: fees. Most firms offering to consolidate your debts will only do so if they can take a fat fee for the privilege. Yet renegotiating with your credit card and bank creditors to get a better deal, which most institutions are prepared to do, costs nothing.

What bankers hate most is the feeling that the customer is not telling them what is going on. Most lenders will be far more open to restructuring your debts if you tell them early on that you are having problems, or that some unexpected bill has turned up.

Half an hour with an IFA, a bank manager or an equivalent is likely to be far more helpful, and certainly cheaper, than putting yourself in the hands of the smiling man on the telly.

john.willcock@independent.net

John Willcock is Personal Finance Editor of 'The Independent'