Don't Get Caught In The Debt Trap

Recently it was reported that over 30,000 people became insolvent in England and Wales during the first three months of 2007 - a new record. Levels of consumer debt also represent a problem in the U.S.

The root of the trouble is that financial institutions are making it too easy for people to spend beyond their means. We are bombarded with offers of loans, overdrafts, credit cards, store cards…

It’s all too easy to hit the shops snapping up every “offer” we come across in the safe knowledge we can take it home today and pay (some time) later. Trouble is, when that day comes too many find it beyond their means and seek to take out further loans - and so the problem grows…

Prevention is better than cure. The golden rule, expressed so eloquently by Dickens through the words of Mr Micawber, is: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Or more simply, spend no more than your income.

Credit cards are a great invention. They’re highly convenient, avoid the need to carry too much cash and used properly allow us a discount on expenditure in the form of a (short-term) interest free loan. But the key to effective credit card use is DISCIPLINE.

If you do find yourself getting into debt that you think you can’t manage - do something about it. Tighten you belt, move your debt to the lowest available interest rate, talk to your creditors, get advice… but don’t whatever you do ignore it.

If you really can’t meet your repayment commitments there is an alternative to bankruptcy. It involves coming clean with your creditors and reaching an agreement with them as to what exactly you can pay. Very often creditors are open to such arrangements as it is better for them to recover some of their money than the likely zero they’d get in the event of your bankruptcy.

Johnny Finnis is editor of personalmoneymanagement101.com a simple and unbiased introduction to finance and investment for ordinary people to make the most of their money. Have your say on our blog

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