Reduce your own deficit in just six-months

With some economists warning that millions are on a financial knife edge, now is the time to take action

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Personal debt in Britain, three years on from the start of the credit crunch, is still among the highest in the Western world.

Between mortgages, loans and credit cards, we owe close to £1.5trn – more than £50,000 per household. Low interest rates and mortgage lenders cutting debtors some slack have combined to shelter household debt from a spluttering economy.

Nevertheless, economist Danny Gabay of Fathom Consulting warned last week that three million households are on a knife edge, unable to cope if there were even a small rise in interest rates. Although the Bank of England is unlikely to raise rates in the short term, there are fears in the mortgage market that if new tighter lending rules are introduced by the Financial Services Authority, many homeowners could find it hard to switch lender, leaving them at the mercy of any future rate rise.

As a result, some Britons may have only a matter of months before their financial lights go out. If you're one of these people or just want to push down those debts, here's a six-month action plan to start getting your finances into the black.

First steps

Dan Plant, web editor at moneysavingexpert.com, urges consumers to prioritise their debts. Typically credit and store cards will charge the most. "If you are being charged interest on your credit card, transfer to a credit card with a 0 per cent balance. Barclaycard and MBNA are currently offering this for 16 months. There is 2.9 per cent one-off fee but still it works out cheaper. However, the big thing to remember is that once the 16 months are up, you will pay 17 or 18 per cent in interest, so start thinking about who you are going to switch to a month before."

Next, decide how much debt you can afford to repay each month. Una Farrell from the debt charity Consumer Credit Counselling Service says: "The first thing to do when repaying debt is to work out what your budget is. This means asking yourself: 'how much is going in and how much is going out?' Don't leave anything out. When deciding what debts are priorities, look at the consequences of not paying them. If you do not pay your mortgage, rent or council tax, you could end up homeless or face criminal prosecution."

Even with the imminent public sector cuts, it's worth checking out turn2us.org.uk to see if you're getting all the benefits you're entitled to, particularly if you're elderly, work part-time or have dependants.

November: Reduce utility bills

Shopping around for the cheapest gas and electricity bills takes a matter of seconds at comparison sites such as energyhelpline.com or moneysupermarket.com and can reduce annual bills by as much as £275. But switching is a slow process – it can take six weeks to move supplier. "If you switch to an online bill tariff, you can save almost £300 a year compared to paper-based bill tariffs. It is not that much hassle although it can take a few months," Mr Plant says.

December and January: Savvy shopping

Research published by debit card Switch this month forecasts Britons will spend an average of £868 on Christmas. There are lots of online tools that can help you push down the costs. Mysupermarket.co.uk and comparesupermarkets.co.uk helps you assess the cost of supermarket products across the UK. Christmas cards and postage can be eliminated entirely by using online ecard sites such as greeting-cards.com. Check out myvouchercode.com for money off bargains in the shops as well as trips away, meals and theatre trips.

February and March: Boost income and cut travel costs

You can ask for overtime at work, or approach market research companies looking for people to provide opinions on everything. Firms such as retaileyes.co.uk and grassrootsmysteryshopping.com will pay consumers to act as "mystery shoppers". It's also possible to earn "rewards" in the form of Tesco, John Lewis or Argos vouchers doing online surveys for websites such as valuedopinions.co.uk. And if you have a spare room, remember you can earn up to £4,250 a year tax free by taking in a lodger.

After mortgage and food, travel is often the biggest personal expense. Train ticket costs can be reduced by buying two or more single fares rather than a return ticket; check out splitticketing.co.uk for more on this. Many UK companies take part in the cycle-to-work scheme, which gives employees a hefty tax break on new bikes. Cyclescheme.co.uk has more details.

April: The home stretch

With outgoings pushed down, there should be room for some debt repayment but in most cases you may have only scratched the surface. However, keeping up with your debts will help your credit score which in turn makes it easier to remortgage to a better home-loan deal. After this, independent financial advisers recommend that you look at building up a rainy-day fund of between three and six months' salary, which should cushion you if you are unable to work due to unemployment or ill health.

Expert View

Alex Pegley, IFA Calculis

"Find out which is the most expensive debt with the highest interest rate and focus on paying that first. As a rule of thumb, don't consolidate your loans into one supposedly handy repayment because that can end up costing you more money in interest over the long term."