How to get out of debt

Diana Clement is a freelance personal finance journalist. Diana, whose nickname is Bargain Betty, has two children: Maia, five, and Milo, three.

If you're feeling that you're up to your eyeballs in debt, you're not alone. Britain is swimming in debt. Total consumer debt in the UK exceeds £1 trillion. That's £7,000 per man, woman and child in this country, excluding mortgages. What's more, personal debt is increasing by £1m every four minutes, says charity Credit Action. But the good news is that people can and do kick debt into touch. But in order to do so the first step is to acknowledge that you have a problem.


How do I deal with my spending demons?


Debt and weight have a lot in common. Often the more weight you gain, the more likely you are to drown your sorrows by eating. Likewise, there's nothing like an afternoon on the loose with a credit card for some instant gratification. Psychologists say we spend money when we're stressed, have low self-esteem or want to impress people around us. The reality is that our spending doesn't always have the desired effect. Remember, debt puts you in chains and you need to take control of your life.


Do you know what you're spending?


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If you're in debt or your spending is out of control you should carry out a personal finance audit. Write down every penny you spend for a month. The result is usually an eye-opener. I found that I spent more than £500 a year on lattes, and twice as much on buying drinks after work as groceries. It's easy to prioritise and cut down on unnecessary items when you know what you're spending. Ask yourself: "do I really need it?" before buying anything. Read our article on surviving on a single income to give you more ideas.


What if I can't bear budgeting?


Don't say budget, say spending plan. Budget is one of those self-deprivation words like diet that only the truly masochistic can stick to. Whereas a spending plan is about prioritising to get the things you want. If you've done your personal finance audit you should be able to see where you waste money. Do you eat out twice a week? Or do you drive to the shops when you could push the pushchair: saving petrol and parking charges? The list goes on. Organise your spending into fixed, variable and discretionary and then prioritise each item.


Should I save first or pay off my debts?


You should pay off debts as quickly as possible, providing the interest rate you're paying on the debt is greater than the interest rate you would earn from your savings. The only "good debt" say financial advisors is mortgage debt -- because you have an asset that is hopefully appreciating in value.


Which debts should I pay first?


Make sure you know the details of all of your loans, credit and store cards. You should reduce your most costly debts first, such as your credit cards. Those are the ones with the highest interest rates or late-payment fees. However beware that in some cases you can be penalised for paying in advance.


Should I tell my debtors that I'm having trouble paying?


In these times of centralised call centres you might be forgiven for thinking you'll get nowhere by speaking to your bank. However, the Banking Code states that banks must consider cases of financial difficulty sympathetically and positively, and reputable lenders will often negotiate a solution with you.

The Yorkshire Building Society, for example, has a dedicated payment helpline manned by experienced payment counsellors and is willing to consider reducing payments for a period of time or changing the method or date of payment for a loan or mortgage.

Most banks will liase with third parties, such as the Citizens' Advice Bureau, at the borrower's request.


Should I use debt consolidation?


Debt consolidation is dangerous unless you know what you're doing. It may appear cheaper to consolidate all of your debts into one. But the lower payments are often due to the fact that the debt has been spread over a longer period of time and you may pay more in the long run.

Debt consolidation firms may load the loan with costly hidden charges and will usually secure the loan against your home -- meaning if you fail to keep up payments you could lose your home. You could "consolidate" your existing debts yourself by replacing them with one personal loan with a low-ish interest rate. If you're organised, you could also become a card tart -- switching your balance from one interest-free credit card deal to another.


Where do I go for more help?


Organisations providing advice about debt problems include private charities, government-backed organisations and those backed by churches such as Credit Action. The National Debtline at www.nationaldebtline.co.uk is helpful, as is Adviceguide from the Citizens Advice Bureau at www.adviceguide.org.uk


Should I choose bankruptcy?


Bankruptcy is often seen as the ultimate financial shame in the UK. Yet tens of thousands of individuals do it every year to escape severe debt. However if you own items of value, such as a house, these could be sold and the money distributed to creditors.

Bankruptcy could affect your employment prospects in the future. It will also affect your credit rating and ability to obtain more credit in the future.

Although bankruptcy is a last resort, bankrupts can be discharged in 12 months in most situations. For more information you can contact the Insolvency Helpline on 0800 074 6918.


Should I use personal finance software to help me manage my finances?


Microsoft Money and other personal finance software is designed to be point and click simple. They're best used if your bank allows you to download your statement. That way you don't have to re-type all the information every month -- something that kills enthusiasm in all but the most organised of people.


Getting out of debt tips


• Try to pay cash instead of using credit cards

• Catalogue shopping is too tempting and too easy. Dump your catalogues in the recycling bin

• Consider getting some extra work for a short period of time

• Save money by buying second-hand

• Take in a lodger or foreign student (they stay for a fixed period of time) to help pay the bills.

• Don't pay a fee for debt counselling. You can get it for free from your local Citizens Advice Bureau, or they can refer you to a money advice specialist if your query is more complex.