Don't save if you have debts

If you're paying interest on debt, this can easily wipe out the benefits of saving.

"With the interest rate at an historic low, charges accrued on debts will easily outstrip money being made on savings," says Tom Howard, a spokesperson for the Consumer Credit Counselling Service.

For example, while the best savings rate is 5%, the average credit card interest rate is 18.8%. Even without taking the tax on your savings into account, this is a huge difference.

Because of this, if you do have debt that's racking up interest, there's no point starting a savings or investment strategy. Instead, your priority should be to clear your debt.

"Tackle the debts with the highest interest rates first as these cost you more in the long run," advises Howard, adding that if you don't know the rate, check your credit agreement or ask your bank.

If this isn't having much impact on your debts, you need to take more drastic action. "Establish a monthly budget detailing your income and expenditure, then contact your creditors as soon as possible. The earlier you highlight the problems, the more they can do to help," says Howard. 

A debt management plan could be an option. This is based on your budget and uses any spare cash to make affordable payments to creditors.

Another option, if you receive a lump sum as a bonus or an inheritance, is to offer a full and final settlement.

With this you offer a one-off payment, which could be less than the outstanding balance, but if accepted can be classed as full payment.

"You'll have to negotiate with each creditor individually and get written acceptance of your offer before sending any money, as not all will accept offers," says Howard. 

You could also consolidate all your loans by taking out one large loan to settle other debts, although you need to be careful as this is often secured against your home – or through an administration order.

This order will be arranged by your local county court and requires your unsecured debts to be less than £5,000 and for you to have at least one court judgment.

Remember, though, you don't have to tackle your debt on your own: there are several debt charities that can help.

Serious debt problem? Your options

If you have a serious debt problem there are a number of ways to tackle the problem.

Debt relief order
This is a form of insolvency for non-homeowners with low incomes who owe less than £15,000 in unsecured debts and with assets of no more than £300 (a car worth up to £1,000 is exempt) and less than £50 monthly surplus income.

In exchange for a £90 fee, debts are frozen for 12 months and creditors do not pursue you. If, after this, reasonable monthly repayments are still unrealistic, your debts are written off.

Individual Voluntary Arrangement (IVA)
Arranged by an insolvency practitioner, an IVA is a legally binding agreement between the person in debt and their creditors.

You commit to affordable monthly payments over a fixed term, usually five years, paying back an agreed percentage of your debts. Your creditors will not chase you or add any further interest.

In exchange for a fee of £600, creditors will write off your debts. You may have to sell valuable assets but you will be able to keep whatever is necessary for day-to-day living. Bankruptcy normally lasts a year but your credit rating is negatively affected for many years.

It will also affect your eligibility for certain jobs, including company directorships, public office, and jobs in accountancy and law.

Debt charities
Consumer Credit Counselling Service
web:  tel: 0800 138 1111
Citizens Advice
Debt Advice Foundation
web: tel: 0800 043 40 50
National Debtline
web: tel: 0808 808 4000