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Struggling with debt

Statistics compiled by the organisation Credit Action paint a worrying picture of the nation's personal finances.

They indicate that 18 per cent of adults in Britain have £10,000 or more of unsecured debt, equivalent to 8.2 million adults - a rise of 30 per cent on the figure published for 2006.

Over two million British consumers (six per cent) can't actually quantify how much debt they're in (according to research accredited to the website Unbiased.co.uk).

Whatever desperate straits someone is in, though, the truth is, there is always a way to escape 'bad debt', the kind of debt experienced when borrowing gets out of control.

This feature sets out the basics of how to do just that, and includes a range of helpful resources and case studies.

And by taking our simple action steps, debit cards, credit cards, loans and mortgages can be managed more effectively in future, too.

Do the maths but don't panic

First things first, the best starting point is to sit down with a piece of paper and a calculator, and add up all of the amounts owed, including credit card bills, mortgage or rent arrears, short term loans, etc; but don't panic as the local Citizens Advice Bureau can help with the numbers if you need them to.

Many conclude that 'bad debt' mounts up a little at a time due to it being 'human nature' in today's world to want more luxury items than we can afford (see What  Newspapers Say About Debt).

Paying household bills often, then, means responding to promotional offers for mortgages and loans offering a little extra, often containing confusing small print.

Mortgages, for example, are not just about the APR (Annual Percentage Rate) as there may be a maze of penalties to tie a customer to charges and punishing payments.

Put an escape plan in place

Step one of escaping 'bad debt' is to take back financial control - which means cutting spending, and putting a repayment plan in place.

One of the best starting points is to create a set of priorities in terms of how debt on cards and loans will be repaid; in most cases it is best to pay off credit cards first, starting with those of the highest APR.

When behind with some payments, it may be necessary to renegotiate payment terms with some of the companies money is owed to.

There is a very good self-help guide on the Credit Action website, which includes advice on how to do this.

Consolidating debt (paying off debts with one loan) should be considered - without taking out a higher loan than needed to repay debts - and bankruptcy is another option in extreme circumstances. 

There is plenty of free advice available on consolidating debt and bankruptcy; see the links below, or call the Consumer Credit Counselling Service on 0800 138 1111.

Take three 'action steps' to better finances

Planning future spending is necessary via three common sense action steps - to ensure the hard work put in to get personal debt under control is not cancelled out by more over-spending.

1. Cutting outgoings even for a few months leads to healthier patterns of spending, as decisions are made as to what is essential and what isn't - the end result being a tried-and-tested household budget; the new interactive resource in the left-hand panel will help you to create a balanced budget, and it is a good idea to open a second current account to pay known bills, transferring by Standing Order the right amount to pay the bills every month from your original account.

2. If something is too expensive now it is quite likely it will be in future too - and a second important action step is to develop an understanding of the true cost of interest free credit before making a big purchase; it often just delays the process of sinking deeper into debt.

3. A third step in the right direction is to fully understand that financial institutions and banks are there to make a profit no matter how compassionate their advertising campaigns; think about what is in it for them when arranging credit, especially when paying off outstanding bills with credit card cheques - which often have high charges.

Consider joining a credit union

Whilst high street lenders meet the needs of the majority of people, organisations called credit unions, run by leaders in the local community and monitored by a government body, provide a more personal service for those who need extra assistance with money matters, perhaps because a complicated credit history means no-one will lend them money.

Membership normally only costs a few pounds, accounts can be set up with a minimal initial deposit, and they are an excellent place to learn all about how to successfully combine saving, spending and borrowing.

To keep APR rates lower than those offered by shops, catalogues, most credit cards and banks, borrowing in a credit union is by application only and set at a sensible maximum level, relating to a member's savings account balance.

What makes a credit union unique is that all profits go back to all members as an annual dividend, so the money stays in the local community.

Increase income

Borrowing from the future, by getting into 'good debt', is probably essential for most people in the 21st century, especially during certain life-stages, for example, for those buying a property on a mortgage, or going through university education.

However, the only way to pay for that debt is to have enough money to be able to afford the repayments.

One last general rule of thumb is: to increase spending and borrowing, it is necessary to increase income - but it is also worth considering whether there might be more to life than simply increasing lifestyle costs and the amount consumed.

COMMON SENSE FROM THE BIBLE

We must fulfil our obligations
'Let no debt remain outstanding, except the continuing debt to love one another.'
Romans 13:8

Learn to be content with what you can afford
'For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that.'
1 Timothy 6:7,8

Recommended reading

The Money Revolution by John Preston (Authentic Media)
How to apply Christian principles to handling your money
http://www.themoneyrevolution.net/

The Money Secret by Rob Parsons (Hodder and Stoughton)
http://www.themoneysecret.info/

Grace and Mortgage: the Language of Faith and the Debt of the World
by Peter Selby (Darton, Longman and Todd)

Useful links

ABCUL - Promoting Quality Credit Unions

Christians Against Poverty

Citizens Advice

StepChange Debt Charity

Credit Action

Financial Services Authority

Money Basics

National Debtline

Scripture quotations from
Holy Bible, Today's New International Version,
© 2004 International Bible Society

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