Get rid of those smoking debts

Overstretched yourself? Melanie Bien shows how to put your finances in order

Too any of us are too impatient to save up for what we want, be it a new stereo, holiday or car. Instead, we would rather "buy now, pay later" using credit cards, personal loans, overdrafts or other finance deals, such as hire purchase. And even when it is time to pay up, full repayment can be quite easily deferred for months on end, as long as you cough up the interest.

Given this trend, it is no surprise that people are increasingly finding themselves in the red. According to Bank of England figures, Britons are in debt to the tune of £691.5bn, including mortgages, bank loans, credit cards and HP. Adverts for debt management companies, such as Baines & Ernst and Gregory Pennington, have proliferated in recent months – but there are better ways to manage your debt.

"Many people don't realise when they employ the services of a debt management company that they still owe money to the individual creditors," says Julie Moulsdale at Direct Line, which offers personal loans. "All they are doing, in effect, is slapping another charge on top – usually a 15 per cent management fee – so, in effect, adding to their debts."

Royal Bank of Scotland, Abbey National and Alliance & Leicester are calling on the Office of Fair Trading to make guidelines stricter and warnings on adverts mandatory. Debt management companies do not take over the liability for your debt; any legal action by your creditors will still be taken against you personally. In other words, the debts are still there and they are not being consolidated into one loan, although you will make only one payment each month to the debt management company.

All the debt management company does is rearrange the loan terms with your creditors and charge you for doing this. Some debt management companies also take a monthly commission from every payment you make to them, so you could find yourself even worse off.

If you get into financial difficulties, the first step is to see whether you can work out a repayment solution on your own. Most people should be able to do this unless they have very severe debt problems.

Calculate your net income and outgoings and see how much is left to pay off your debts. You need to deal with priority debts first – those which, if left unpaid, would have serious repercussions. These could include, for example, mortgage repayments and utility bills.

The next step is to get in touch with your creditors and ask if they would be prepared to accept smaller payments over a longer period. Most lenders should be able to come to an arrangement with you.

If you fall into arrears without speaking to your lender, or simply cancel a direct debit, legal action may be taken to recover what you owe. For this reason, you should inform your creditor as soon as you know you are going to have difficulty making a repayment. The temptation is to do nothing and hope the problem will go away, but this inevitably makes things worse.

If you really need help prioritising your debts, contact a Money Advice Centre, Citizens Advice Bureau or national counselling agency rather than a debt management company. These organisations provide free advice and assistance to those in financial difficulties.

Contacts: see your telephone directory for details of your nearest Citizens Advice Bureau, Money Advice Centre or Law Centre. To find a personal adviser near you, call the Money Advice Association (01476 594970, England and Wales only). In Scotland, call Money Advice Scotland (0141 572 0237). The National Debt Line is on 0808 808 4000 (Mon and Thurs, 10am-4pm; Tues and Wed, 10am-7pm; Fri, 10am-12pm).