Debt is a fact of life. Debt comes in many shapes and forms including mortgages, personal loans, overdrafts, credit, debit and store cards, and hire-purchase (HP) agreements. Even if you manage to avoid any of these necessary evils, you are likely to be in debt to the telephone company, the utility companies etc. Each time you require new credit-to secure a mortgage or if you request a new credit card, for example-the provider of the finance will want to assess what kind of risk you represent, and whether you will pay off your debt. To help make their decision, they will try to find out as much information about you and your money as possible.

Handling Arrears

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It pays to take control of your debts before they become unmanageable, and to take action sooner rather than later. If your debts are mounting up, take a look at both sides of your finances (income and expenditure) and try to draw up a plan. Then put it into action. You may be able to:

• See whether there is any scope to earn more money
• Do additional work at weekends or in the evenings
• Rent out a spare room
• Sell anything you do not need

Controlling your expenditure

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It should go without saying that you must cut out all luxuries, but see whether you can go further. You will need to be ruthless, but the quicker you clear your debts, the better. If you have goods on hire purchase and have made half the payments, return the items, since if you are up to date with your payments, you will not owe any more money.

Dealing with your creditors

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Show all your creditors your budget and plan of action, and make them an offer. Ask them whether they will accept reduced payments for a period while you put your affairs in order. See whether they will delay charging interest while you clear the debt. Make regular payments, even if they are smaller than demanded. This shows evidence of your intent, and is more likely to gain sympathy from the creditor than paying nothing at all. If you come to agreement with one creditor, write to others with details. They may also agree to a compromise about payments, or freeze interest for a period. The golden rule is not to hide from your problems and to be proactive-draw up your own budget, stick to it, and always make small payments, even if the company does not agree to your plan.

Getting your priorities right

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Some debts are more important than others are. Try to maintain mortgage payments, as failure to pay will hit your credit ratings for years afterwards, and prevent you from obtaining a mortgage again. Water and electricity are essentials, so negotiate with the utilities. Provide your plan of action to all other creditors, making sure that you stick to it. Finally, make sure that you keep copies of all correspondence.

What not to do

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Do not borrow more money at higher rates of interest to clear debts that you cannot afford. Do not draw up an unrealistic budget. Try to avoid bankruptcy.

What to do

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Draw up a budget, and stick to it. Keep your creditors informed in advance of any changes to your plans or agreed payments. Get advice.

Some debt is good.

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Borrowing for a home or college usually makes good sense. Just make sure you don’t borrow more than you can afford to pay back, and shop around for the best rates.

Some debt is bad.

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Don’t use a credit card to pay for things you consume quickly, such as meals and vacations. There’s no faster way to fall into debt. Instead, put aside some cash each month for these items so you can pay the bill in full. If there’s something you really want but it’s expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it’s due and avoid interest charges.