The credit trap

Consolidating your debts may not be your best bet, writes Rachel Fixsen

Buying on credit is so easy - it's almost as effortless as letting your credit bills get out of hand. Before you know it, monthly repayments can eat up most of your disposable income and you end up with little left to live on.

Short of winning the lottery, what can you do to escape from this trap? "People have got to be motivated to solve the problem before anything can be done about it," says one debt counsellor.

Financial advisers say many of their clients do not realise just how much interest is charged on the money they borrow, whether on credit cards, personal loans or car payment schemes.

Credit card balances can cost as much as 26 per cent in interest a year, personal loans cost up to 27 per cent and you could pay up to 41 per cent interest on an unauthorised overdraft, according to financial data provider MoneyFacts. The effect of these rates can be crippling.

For example, if you had a pounds 1,000 balance on a furniture store card, a pounds 600 balance on a department store card and owed pounds 1,400 to Barclaycard, then you would probably have to pay a total of pounds 700 a year in interest alone. Add to this repayments on a pounds 70,000 mortgage and a new car, and even someone earning pounds 25,000 could find themselves stretched to meet their minimum payments.

Even if you can't really afford it, it is relatively simple to get access to credit. "The problem is, you can get a Dorothy Perkins store card, and then go next door, and get one from another shop," says Stuart Davidson, of the National Association of Citizens Advice Bureaux.

Many organisations share information about how much credit a person already has. This is called white data, as opposed to black data, which includes information about any county court judgements you might have against your name.

When you owe here, there and everywhere, consolidating your debts often seems a attractive idea. If you have property which is not fully mortgaged, remortgaging it to include the amount you would need to pay off your other lenders might make sense. The rate of interest you pay on your mortgage is likely to be lower than on other borrowings.

Sometimes you can get a personal loan at a relatively low interest rate. Royal Bank of Scotland Direct offers loans of between pounds 2,000 and pounds 15,000 at rates between 12.3 per cent and 13.9 per cent - considerably less than most credit cards.

But Mr Davidson points out that as unsecured personal loans are often repaid over a longer period than store cards, you can end up paying more over the whole term.

If you find yourself with problems, the first thing you should do is contact yourlenders. "The majority will suspend the interest payments to help you get out of difficulty," Mr Davidson says.

But there's no point in consolidating your borrowings unless you attack the root of the problem. Why did you overspend, and can you stop this pattern of behaviour? "Once you consolidate, if you then take out more credit, then you aren't doing yourself any favours," he says. Younger people who have not settled down are especially apt to overspend. Spending on items which used to be regarded as luxuries is often seen as essential now.

Peter White, managing counsellor at the Consumer Credit Counselling Service, says staff at the service always work out a priority budget with their clients. "You've got to pay your mortgage, council tax - and food tends to be habit-forming," he says. People can get into serious trouble by using available funds to pay to lenders who shout the loudest rather than keeping up mortgage payments.

Setting a watertight budget helps bring it home to clients that any non- essential spending will mean having to forgo an essential payment, and the consequences of this could be dire.

National Debtline, 0121-359 8501; Consumer Credit Counselling Service, 0800 138 1111; Look in the Yellow Pages under "Counselling and advice agencies" for the Citizens Advice Bureau.