The debt trap - and how to stay out of it

"FACE up to it!" These are the words of Nikki Humberstone, money management training officer at York's Citizens Advice Bureau. "The first step towards getting out of debt is acknowledging there is a problem."

Wise words, made even more urgent by the discovery that shocking numbers of young people in this country fail to grasp basic financial concepts, such as bank balance statements and interest rates.

A nationwide study released last week by the Financial Services Authority reported some startling facts.

It found that the 18-40 year olds questioned were not planning ahead. Seven out of ten had made no provision to face a drop in income - although 28 per cent of people had experienced such a drop in the last three years.

Although most of them believed a state pension would not provide them with the standard of living they wished in retirement, more than a third had not started their own pension.

Not surprisingly, debt is a problem. One per cent of those questioned - which could represent half a million people - said they had real financial problems and had fallen behind with many bills and credit card commitments. Six per cent, or three million people, said was is a constant struggle to keep up with commitments.

And the survey discovered little ability to get value for money. Nearly eight out of ten do not shop around or talk to a financial advisor before buying a product.

The youngest adults are having the most serious problems handling cash. The number of 18 to 29 year olds declaring bankruptcy has more than doubled in five years, from eight per cent to 20 per cent.

For those working at York's Citizens Advice Bureau, this comes as no surprise. More than 11,000 people went there last year with debt-related inquiries and half of those were young people.

These were not the usual suspects: students, or people from disadvantaged backgrounds; debt, it seems, is a democratising issue, affecting every strata of society.

From the sixth form students boosting their wardrobes with store cards to young workers funding a social life on credit, and students totting up thousands of pounds of debt in their pursuit of higher education, being in the red has become, if not the fashion, at least the norm.

The "buy now, pay later" culture we live in has taken on epic proportions and young people are serious consumers. Credit that would have been denied to them 20 years ago is now readily available. In fact, young people have now become a targeted demographic for the credit industry, constantly bombarded with offers for loans, store cards and credit cards.

The availability of credit, combined with poor budgeting skills, is an explosive combination. Kate Highnett, also of the Citizens Advice Bureau (CAB), wants to foster a new attitude to debt: "We need to be preventative in our approach. Young people leave home at 18 with no idea how to manage money," she says.

"We want to promote budgeting and looking after finances as a life skill in order to prevent the ever-deepening crisis with debt."

York's CAB offers a two-pronged approach to debt management. It encourages the notion of personal responsibility, offering a free training course to anyone who wants to learn how to manage their money. It also encourages awareness in the way loan companies operate: "Debt is big business and there is no such thing as free credit. Even debt consolidation companies charge a commission fee."

The message is clear: young people must grow up when it comes to financial matters, recognise the exploitative nature of the credit industry and take personal responsibility for their lifestyles. As they say, ignorance is no excuse.

Before you can tackle your debt problem you need to collect information about your financial affairs and follow some simple steps:

Make a complete list of your debts. Remember to divide them into separate headings - priority and non-priority debts. You will have to tackle your priority debts before you tackle your non-priority debts.

Work out your income and expenditure. Be honest and make sure the amounts are realistic. Your resulting budget will show you if you have any money left over to divide among your creditors. You may even be able to identify where you can make some savings. If you encounter problems, an advice agency can give you confidential advice on what to do.

Do not ignore creditors' letters or phone calls. Contact your creditors as early as possible and explain to them why you are in debt. If you phone, you should follow up the call with a letter, confirming what you said on the phone. Send all the creditors a copy of your budget and the list of your debts. If you do not feel confident with your creditors, contact a free advice agency.

If you have only a small amount of money available for your creditors after your essential spending, you may have to offer all of this to priority creditors. You could have little, or nothing, to offer to non-priority creditors and you should explain this to them.

Do not borrow more money to repay your debts. Think about the ways in which you might earn extra money or increase your income instead. If your income is low, you may be able to claim benefits.

Information obtained from adviceguide.org.uk

Case study: Jennifer James, 27, from Tang Hall, York (her name has been changed to protect her privacy)

When did you begin to lose control of your finances?

"My debt problems started when I was 19. I maxed out my first credit card and got a loan to cover it. Then I maxed it out again. I had three store cards which I owed money on, but I ignored the problem as it got more and more out of control."

What factors contributed towards your heavy spending?

"I was living way beyond my means, going out two or three nights a week, taking up to three holidays a year. At 19, my grasp on money was totally unrealistic. I thought I had more than I did, that all this debt was manageable, and that I would find a way of paying it all off in the distant future."

What was the lowest moment you endured?

"I was pregnant and my partner left the country. My creditors started calling every day; I was under constant strain and started suffering chronic headaches from anxiety. On one occasion, a female representative started screaming at me down the phone and told me that even though she was a single mum, she still managed to pay her bills. I was devastated."

What happened in the end?

"I was advised to declare bankruptcy but I didn't want to. I carried on for ten months, supporting myself and my child with £25 a week, fielding phone calls from creditors, until I gave in and declared myself bankrupt. It was the most stressful thing I've ever done, but also the easiest."

How in debt where you by this point and why did you wait to declare yourself bankrupt?

"I owed £18,000. I wanted to pay off my creditors, but it was impossible. At one point I had £900 going out and £400 coming in. I realised I couldn't go on like that any more."

What is life like now?

"I haven't looked back. I deliberate over every penny I spend nowadays, but my bills are paid and everything I have is mine. I can build my life back up from here."

What effect has going bankrupt had on your ability to make major purchases, such as a car or a house?

"The bankruptcy has been removed from my records but it would be difficult for me to get credit. It will be a while before I can buy a house anyway, but I will have a long, hard battle to prove my credit-worthiness to a bank manager. I plan on keeping my bank balance records in the black for the rest of my life, and I'll make whatever personal sacrifices necessary to keep them that way."

Updated: 10:01 Thursday, April 06, 2006