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Debt spiral

A very small proportion of the UK population are declared insolvent, but serious debt, or the risk of serious debt, affects millions of people in the UK. Whilst around 1.5 million people are finding it seriously difficult to pay off their debts, many more are potentially likely to join the debt spiral, if they were to suffer a major financial incident, such as serious ill-health or losing employment.

Which step of the debt spiral staircase are you on?

To work out where you are on the credit spiral, see which of the following you can say 'yes' to.

0) If I lost my income, my savings wouldn't be enough to survive for three weeks or so

If this doesn't apply to you, you are in the minority. More than half the population could not survive for 17 days (52%) if they lost their income.
Tip: The amount that people are regularly saving has fallen to a long-term low, in part driven by food and fuel inflation. However, if you are able to do some regular saving, however little, it helps build a fund to cushion you against future problems.

1) I could not afford more than £500 to meet a household emergency without borrowing money

45% of people say this applies to them.
Tip: If you do have a household emergency, try not to plunge deeper into debt to get out of it. A small fund can help you repair things rather than replace them, or to purchase a second hand replacement rather than buying new, and incurring further debt.

2) I have not got enough savings to survive for 11 days if my income disappeared

This applies to just over a third of households (36%).
Tip: If your savings are lower than this, fluctuations in cash flow mean that you will go overdrawn periodically if you aren't able to control your spending very tightly. Keep a close eye on your bank balance - going into overdraft can be relatively expensive, even if you are only overdrawn by a small amount. An agreed overdraft will be cheaper, so if you are likely to need to use an overdraft facility it makes sense to agree one in advance, providing there isn't a large fee for this.

3) I owe money to my energy supplier

According to uSwitch.com, 6.8 million households are in debt to their energy supplier. Over a quarter (26%) of energy customers were 'in the red' on their last energy bill and two million consumers are on debt repayment programmes to energy suppliers.
Tip: Check where you are using electricity and gas - is there anything you can do to reduce your consumption.

4) I spend more than 30p of every £1 I earn on unsecured debt re-payments.

Over 14% can say yes to this one. This is twice the level it was a year ago, and the same research shows that 6% of people are spending half their income on unsecured debts. Government guidelines suggest a threshold for becoming over indebted as an individual spending over 25% of their gross monthly income on unsecured repayments.
Tip: More than 10% of the population have not added up their total debts. However difficult this may feel, it is essential to know where you stand. Then you can start to take action.

5) I have borrowed money to help meet my housing costs

11% of us (2.8 million households) have borrowed money to help meet our housing costs in the past 12 months. When core living costs need to be funded by debt, this is a real indicator of you being at risk of serious debt.
Tip: Make sure you are spending on priorities, and consider whether there is anything you can do to save money on your regular costs - transport, food and utilities.

6) I am worried I am going to become bankrupt

Over 100,000 people will be declared insolvent this year. That's one in every four hundred UK citizens, or a quarter of one per cent (0.25%). It may not sound much, but it will take them some years to work through the implications of it.
Tip: The earlier you take action, the more likely it is that you can minimise the impact of your debt. There is plenty of free advice available - StepChangeDebt Charity (http://www.stepchange.org/) is a good place to start and also see our advice page Are you struggling with debt?.

Sources
Credit Action (http://www.creditaction.org.uk/) September 2008 Debt Statistics
"Breaking Point" from Shelter, June 2008

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