Is your Christmas borrowing something to worry about?

Final Reminder Bills

Millions of Brits will be relying on borrowing to pay for at least part of their Christmas this year. It's hardly surprising given that according to the Centre for Retail Research, the average household will spend £794 on the festive season, and when it asked people a month ago, 70% hadn't put aside a penny to pay for it.

Borrowing isn't always a bad idea when you need to spread the cost - especially if you are canny about it. But would you be able to spot when sensible borrowing becomes problem debt?

Some people will have planned their festive borrowing wisely, and for them, it isn't necessarily a problem. An interest free credit card can be a useful way to spread the cost, as long as you can afford to pay the debt off before the interest free period runs out - and have the discipline to do so. If you have a strong credit record, and you're not carrying significant debts, then borrowing £794 needn't cost you a penny in interest or a single sleepless night.

Unfortunately there are plenty of people who haven't borrowed this way. There will be those who have dipped into an expensive overdraft, used an existing credit card with an expensive interest rate, or even taken a payday loan.

There are also those people who are carrying debts before they start - so an extra £794 takes them deeply into worrying territory. According to the Money Charity, British household debt has hit £1.5 trillion, and the average UK adult owes about £30,000 - over £1,000 more than the same time last year. Credit card debt alone has risen to £65.7 billion.

It's not always easy to spot when borrowing is getting out of hand: most people wouldn't let it do so if they could see it coming. However, Jon Paul Kelly of Trust Deed Scotland, says there are seven warning signs, and that if you recognise any of these, it's time to ask for help.

1. You are transferring debt between credit cards - this is the easiest way to get into problem debt

2. You are barely meeting the service payments each month - this leaves little to no cushion in case an emergency comes up during the month

3. You are in a secure loan for a large piece of collateral - i.e. a car, and the car becomes repossessed

4. You are constantly concerned about money - this is a sign to trust your instincts that it is not a good debt

5. You are ignoring the debt and all feelings of it. These are clear psychological indicators

6. You find yourself embarrassed about debt

7. You are receiving final demands letters from creditors

It's always best to get help as soon as possible, and charities such as Citizen's Advice and StepChange are great places to start. You can make an appointment to go over your entire financial position, and talk through all of the options you have to enable you to get back on top of your finances.

This may mean a debt management plan - which the charities can help you with - which can often freeze the interest while you pay off your debts.

If things have gone further, you may end up with a legal solution such as an IVA in the UK, a Trust Deed in Scotland or Bankruptcy, which will have a serious impact on your finances (and your credit record).

If you act quickly after debt has become an issue, you should be able to avoid the more serious legal solutions

However, even if you find yourself facing serious measures like this, it's worth bearing in mind that they all involve a process, and every day you are going through the process, the closer the light at the end of the tunnel will be. Your debt problems don't need to last forever, if you commit to facing up to them and doing what needs to be done.

Most common causes of debt
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Most common causes of debt

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.

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