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Household debt set to soar: how to avoid spiralling into the red

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British households took on an extra £900m of non-mortgage debt in February before the brutal effects of the coronavirus took hold.

Figures from the Bank of England show that consumers have continually been taking on more and more non-mortgage debt every month for more than seven years.

Now experts fear Brits could borrow billions more as social distancing and lockdown measures continue.

“There’s no doubt there will be a boom in debt in the coming months, as people lose their jobs, see their salaries reduced or see available work dry up,” said Laura Suter, personal finance analyst at investment platform AJ Bell.

“While the hope will be that this is a short-term jump in credit card and overdraft uses that can be re-paid once people are back on their feet, the real concern is that people will quickly see interest rates mount up and debt start to spiral.”

The government and banks have stepped in to offer some much-needed relief with measures such as mortgage holidays, extension of credit, interest-free periods on overdrafts or payment holidays for loans.

However, there are steps individuals can take to avoid their own personal debt crisis.

Sarah Coles, personal finance analyst, Hargreaves Lansdown, said: “The flexibility on offer from the banks will be a lifesaver for millions of people – especially given that there will be a wait before the government help kicks in.

“However, it’s essential we don’t use this flexibility as an excuse to bury our heads in the sand and try to borrow our way out of any financial difficulties. If we’re not very careful now, when these special arrangements come to an end, we could be left with more debt than we can manage.”

Here are Coles’ top tips to keep borrowing under control:

See what government help is available

The government has stepped in with an unprecedented level of support. It’s paying 80% of wages for furloughed staff up to £2,500 a month and 80% of the average monthly income over the past three years for self-employed people up to £2,500 a month.

Check again

If it appears you fall beyond the scope of help, don’t assume anything: check. So, for example, furloughed staff can include anyone laid off during the crisis if their employer agrees to put them back on the books. And self-employed people with less than three years of accounts can get help as long as they submitted a tax return for the most recent year.

Don’t assume anything is written in stone

There are some people who have fallen through the cracks so far – including people who run their own limited company and have no premises. And while things look horrible now, don’t assume this will be the case forever. The situation is constantly changing, so keep your eyes peeled for developments.

Don’t write off benefits

The government has removed some of the barriers for people applying for Universal Credit, and made payments more generous, so it’s worth checking to see what you could be entitled to. The Turn2Us and StepChange websites are packed with useful information.

Cut your costs

The first things to go are luxuries, but don’t stop there. If you haven’t shopped around for gas and electricity, media and phone contracts then you could save substantially by seeing what else is out there.

Get in touch with companies you pay bills to

Mortgage companies should offer a three-month payment holiday to anyone in financial difficulty. This includes buy-to-let investors, so if you rent, they may well pass that onto you. Even if your landlord doesn’t have a mortgage, talk to them, explain your situation and they should work with you on a solution you can both live with. Utility companies and water firms will also be flexible about pausing bills or cutting them in the short term.

Be patient

It’s going to take a long time to get through on the phone, so it’s worth checking online FAQs or seeing if there’s a coronavirus section on the website which explains what the company will do for you. Even if you’re struggling to contact them, you should never just stop payments, or you will damage your credit rating. Contact them and agree a change before you do anything.

See’s guide: Coronavirus and your finances for more information.

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