Tackle debt or you'll pay all year for Christmas

More than losing weight or going on the wagon, your most important resolution should be to get in good financial shape, says Chiara Cavaglieri

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The Independent Online

Credit card bills will be arriving soon, and if Christmas has taken its toll make it your new year's resolution to get back in the black. Good intentions are one thing, but if you don't want to be paying for the festivities this time next year you'll need to be disciplined.

Assess the situation

The first step is to take stock of the situation and see exactly where your money goes. Go through your bank and credit card statements for the past three months and write down a monthly budget listing everything that you currently pay out, not forgetting annual bills such as the MoT, holidays, birthdays and Christmas.

Cut back on unnecessary spending

Once you've got the list in place, review each item and ask whether you can manage without it, or reduce the amount you're paying.

Andrew Hagger of Moneynet.co.uk says: "When it comes to things like council tax, you just have to bite the bullet and pay up. But in terms of your mortgage, gas, electric, water, telephone and broadband payments, consider ways of reducing your costs, either by switching provider, changing your tariff or in some instances cutting down on consumption." Analyse any direct debits and standing orders. You shouldn't cancel important policies such as life insurance but do sacrifice luxuries such as a gym membership.

Clear most expensive debt first

Look at your overdrafts, credit cards and loans and find out the rate you are being charged on each. This will enable you to clear your debts more efficiently, prioritising the most expensive debt first. Store cards are typically more expensive than credit cards and overdrafts so you will usually need to pay these off first but don't forget you still need to make at least the minimum repayments on your other debts. Set up a direct debit for them so that you don't forget.

Shift your debt to an interest-free credit card

Apply for an interest-free balance transfer card to give you some breathing space. These cards allow you to shift your debt on to one card with no interest to pay for a set number of months. There is a transfer fee to pay (typically 2 to 3 per cent) but all of your money will be going towards reducing your debt. Some cards are interest-free for as long as 29 months but you must be confident you will clear the debt in the introductory period.

Charlotte Nelson of Moneyfacts.co.uk says: "Consider the length of the introductory deal. If it is likely that you will not pay off the balance before this deal ends or a large sum needs to be paid, it may be wise to consider a low rate for a longer length of time."

The Rate for Life deal from MBNA is a good alternative because it charges just 6.9 per cent for as long as it takes you to clear your balance.

Improve your credit rating

If your credit history isn't good enough, you won't be accepted for the best credit cards. There are alternatives such as the Barclaycard Platinum card (interest-free balance transfers for 18 months with a 2.9 per cent fee) and the Capital One Classic Complete card (interest-free transfers until May with a 3 per cent fee), which accepts people who have had defaults and county court judgments in the past. But you should also look at your report from one of the three credit-reference agencies (Callcredit, Experian and Equifax). Check you are on the electoral roll and close down any credit deals you don't need. You can also amend a note against anything potentially damaging.

Use credit cards carefully

Never use a credit card for cash withdrawals or credit card cheques because you will be charged fees and interest. Make at least the minimum repayment every month to avoid penalties (if you have a zero per cent introductory deal, you will lose the interest-free status). Once you have a grip on any debt problems, you need to pay above the prescribed minimum repayment each month because the quicker you repay, the less that debt costs overall.

Move to a better current account

Switching to a new current account can be an easy but effective way to save money. Costs vary substantially but building and friendly societies are the least expensive, according to a new Friends Provident Foundation survey. Whichever provider you have, you need to know how you are being charged for an authorised overdraft (arranged in advance up to a limit agreed with your bank) and an unauthorised one (when you go overdrawn beyond the limit that has been set). First Direct has a permanent £250 overdraft, for example, but you must be able to pay in at least £1,000 a month. Nationwide's FlexDirect account has a zero per cent arranged overdraft for the first 12 months (costing 50p a day thereafter) with no minimum monthly income required.

Avoid payday loans

These short-term loans are an extremely expensive way to borrow. You can typically borrow up to £1,000, paid back over a number of days or one month (until your next pay day) and it is all too easy to apply, but the interest is sky-high and the penalties for missed payments and extensions steep. Advertised annual rates can be above 5,000 per cent and although this means little because the loans are arranged over 30 days rather than one year, it serves as a reminder that you are paying far too much.

Talk to your lenders

Don't put off speaking to your lenders if you are having problems.

Ian Williams at Debt Advisory Centre says: "Interest and charges will continue to mount up but once you've told your lenders you are in financial difficulties these can usually be frozen. Don't just hope that the problem will go away on its own – it won't!"

If you are getting behind on the mortgage, or think you will in the future, always speak to your lender as it is obliged to help you and may allow you to reduce your monthly payments by lengthening the term of the loan or give you a payment holiday until you get back on top of things.

Get some free help

Charitable organisations such as Step Change, Nationaldebtline.co.uk and Citizen's Advice offer free debt counselling and help you negotiate with your creditors. They should also point you in the right direction if there are any benefits you are entitled to. If you are claiming benefits or on very low income, you may also be eligible for a council tax reduction.

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