How to avoid the perfect storm of debt

Millions of borrowers could tumble into an abyss before the year is out unless they take immediate action.

This is the alarm sounded by the Personal Finance Society just as households are receiving their credit card bills, revealing the debt they have racked up over the festive period.

It points to a ‘perfect storm’ of factors driving borrowers to the edge. They include a continued love affair with expensive credit cards and popular car finance arrangements, through to creeping interest rates and inflation that continues to outstrip wage increases.

Expensive credit cards and popular car finance arrangements are causing debt

Keith Richards, chief executive of the society, a group for professional financial planners, says: ‘Borrowing levels are at a high not seen since the late 1980s when consumers became so mired in debt that personal bankruptcies and home repossessions hit record levels.’

Low income families are the most vulnerable. A new report from the Institute of Fiscal Studies suggests one in five among this group have debt problems, compared with one in 20 wealthier households.

The Office for Budget Responsibility predicts household debt will reach 47 per cent of income by 2021. Richards believes a large savings gap will only compound the problem, with just 1.7 per cent of incomes salted away for a rainy day in the first quarter of 2017 – the lowest ratio since official records began in 1963.

The Bank of England warned recently of the rapid rise in unsecured consumer debt – now more than £200 million – prompting banks to tighten up on lending.

Without a proper financial strategy, households risk falling into a borrowing abyss.


First, ask for a credit report from an agency such as Noddle and ClearScore (free) or Equifax, Experian and Callcredit, which make a small charge. They will provide a list of all your loan contracts.

James Jones of agency Experian suggests using any excess savings to pay off debt and improve your credit score. He says: ‘Arranging to pay a regular amount on a particular date avoids missing loan payments, looks good to lenders and eventually leads to lower rates on future loans.’

Combining several high-cost loans into a single loan with a lower rate will let you pay off debt faster. But watch out for any fees that may be levied for giving up old loans and setting up any new arrangement.

If used wisely zero per cent credit cards are a boon for managing debt over periods of up to 30 months.

Borrowers will require a good credit score to be eligible for the cards offering the longest period of zero per cent credit. But factor in balance transfer fees of between 3 and 5 per cent. Also, aim to repay the debt by the end of the interest free period, otherwise rapacious interest rates will kick in.

Zero per cent credit cards are a boon for managing debt over periods of up to 30 months

Zero per cent credit cards are a boon for managing debt over periods of up to 30 months

It is good some days to try not using a credit or debit card and doing the supermarket shop with just cash.

If you consolidate your debts it is key to avoid fresh debt. Helen Morrissey is personal finance expert at insurer Royal London. She says: ‘Be brave and check bank statements more frequently. It helps to detect dangerous patterns – such as overspending around payday and leaving yourself financially short later in the month. If you see a planned purchase might tip you in to overdraft it should make you think twice about proceeding.’

Budgeting is vital. The old fashioned paper and pencil method can work effectively, but there are now some useful phone apps.

These include OnTrees from MoneySuperMarket,, Moneydashboard and Chip.

The latter uses an algorithm to work out how much you can afford to save each month and sweeps it into a savings account. If debts get out of hand, seek help from organisations such as Citizens Advice and charity StepChange.

They can help devise a strategy to repay your debts, including in extreme cases whether to consider legal agreements such as an individual voluntary arrangement or bankruptcy.

It is important to know that some debts are more pressing than others. For example, a mortgage, energy bill debt or income tax take priority over unsecured loans such as a credit card, an outstanding mail order payment or a parking fine.


Save £600…with the extra penny challenge

It is important to set realistic goals.

It is important to set realistic goals.

Save 1p on day one, 2p on day two and 3p on day three and so on for a year – with 365p added to the kitty on the last day.

By the end of the year you will have magically built those easily forgotten coins into a £600 pot. This is just one of dozens of simple savings suggested by B, the digital brand of banks Clydesdale and Yorkshire.

As part of its annual ‘Take the B-Tox Challenge’, the bank is encouraging people to take painless savings steps. These range from going vegetarian two days a week to installing low energy LED light-bulbs.

Helen Page, marketing manager, says: ‘It is important to set realistic goals.

‘It is also good to make those goals fun, such as labelling a savings pot with an appropriate name.

‘One customer is putting aside cash in a pot called The Cursed Child.

‘It’s not for their offspring – but for tickets to the Harry Potter stage play in London.’


Borrowing need not be a problem if your finances and repayments are well managed. But the best loan rates are offered to those with the strongest credit records.

Tidy up your credit record

 Check your record at a credit reference agency and remove any errors, such as fraudulent applications taken out in your name.

Pay bills promptly

 This will help build a strong credit score. Avoid keeping a high balance on a credit card as lenders fear cardholders will eventually not be able to pay off the debt. Keep loan requests to a minimum to avoid looking desperate, causing lenders to turn down applications. Cancel cards that you no longer use.

Paying bills promptly will help to build a strong credit score

Paying bills promptly will help to build a strong credit score

Personal status

If divorced or separated ensure a former partner’s details are scrubbed from any joint account so their borrowing behaviour does not affect your credit record.

Release savings

It is possible to free up hundreds of pounds of wasted cash by switching – everything from motor and home insurance to gas and electricity. Do a comparison search at websites such as MoneySuperMarket or GoCompare. Stop unwanted direct debits such as unused gym memberships and magazine subscriptions. This can save £300 a year according to comparison service SmartBill that is happy to identify and cancel unwanted payments.

Control the plastic

Pay off any balance in full each month to escape interest charges. Avoid expensive storecards which offer tempting in-store discounts but charge high rates of interest on uncleared balances. Set up a direct debit for monthly repayments.

Delayed gratification

Save for items instead of putting them on tick. The desire to purchase may have faded by the time the sum required is saved. Invite friends for a low-cost supper rather than eating out.

Save for a rainy day

The Money Advice Service recommends households have the sum equivalent to the cost of three months’ essential outgoings available in an instant access savings account. So if essential monthly bills are £1,000, the target emergency pot should be £3,000.

Prepare for worst

Ask yourself who will meet your loan repayments if you are too ill to work? An employer might pay a salary for a while and state benefits are limited. Consider income protection cover which pays a monthly income in such circumstances. Insurer Royal London says a 35-year-old non-smoker earning £35,000 can get cover paying £1,729 a month for two years – after a 13-week waiting period – for about £14 a month.