Time to consolidate your debt

If your debts are getting too much for you, it is not too late to make a New Year resolution to sort them out. Recent research from the debt consultancy Thomas Charles showed that 15% of the UK population is in serious debt. Meanwhile, a survey by the City watchdog, the Financial Services Authority, found that nearly half (48%) of debt-laden Britons are more likely to go on a diet or book a holiday than try to sort out their finances this month.

A horrifying (24%) of 16-44 year olds are worried or scared about the bills arriving in the new year, while getting on for two in three (58%) either had no idea what Christmas had cost them, or, if they did know, had overspent. A quarter (23%) used loans or credit cards to finance their binge.

Chris Pond, FSA Director of Financial Capability, said, "Sorting out your budget isn't the most interesting thing you will do after Christmas, but it could be the most important. The consequences of not managing your money properly can be devastating. If you don't make payments on time it can affect your credit history, and at worst put your home and even relationships under pressure."

So, what can you do? If your finances are all over the place and you find it hard to keep track of what you owe to whom, consolidating your debts into one or two more manageable loans could be the way forward. Recent research has shown that, if Britons consolidated their unsecured debts, they could collectively save £15 billion in interest.

Do you want to reduce your financial outgoings? Try our consolidation loan tool to see if you can keep more of your money.

Credit card debt is among the most expensive, so if you are having difficulty making your monthly payments, or are only paying off the minimum each month, it could make sense to move the debt elsewhere. This could be to a new card, or a personal loan.

Unfortunately, fee-free balance transfers on to a new card with 0% interest tend to be a thing of the past, so you will either have to try to move your debt to a card charging a lower rate of interest or, if you can find a suitable card that charges no interest, you will have to take the hit of a transfer fee of up to 3%. If you are lucky enough to move your debt to a 0% card, you must never spend on it. Because of the way payments work, usually with the cheapest debt being paid off first, you will find yourself continuing to rack up yet more interest if you carry on spending.

Lifetime balance transfer credit cards

Of course, if you are having trouble with debt, the best advice is to stop spending altogether. However, if you must make credit card purchases in future, use another card for spending while you pay off your old debts. That way the old debts stay interest-free.

If you can't find a new card that suits you, you may have to convert your card debt into a formal loan. While a loan is not as flexible as a credit card - you probably won't be able to vary the payments each month - at least you will know exactly how much you have to find for each repayment and for how long.

But proceed with caution. Lenders are tightening up their lending criteria, and are offering the best deals only to those with unblemished credit records, so be realistic about what you may need to pay in the way of interest.

If you are refused, don't make repeated applications or you may damage your credit record. Get a copy of your credit record to find out if there is anything amiss. You should in any case approach your own bank to see if it can come up with a competitive offer.

When choosing a loan, look out for early repayment penalties, if you think you might be lucky enough to receive a bonus or a windfall within the term and might want to pay the loan off early. Some lenders will charge you a hefty fee for the privilege.

Want the personal loan that is right for you? Find it with Moneyextra's comparison service.

One thing you should think very carefully about is exchanging unsecured debt - such as credit card and ordinary personal loan debts - for secured debt, either through an increase in your mortgage or via a special debt consolidation loan. Remember, with this type of loan the lender takes a charge on your home, so if you dont make your payments on time and in full you could find your house being repossessed and your family out on the street.

Problem debts? Who can help?

08 January 2008 © Moneyextra.com

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