Why getting out of debt has become a matter of urgency

The news on the economic front is starting to get better. The so called "green shoots" of recovery are sprouting all over the place. That's good news, isn't it?

Yes and no. Good news in that once the economy stops contracting and starts growing again, unemployment will stop going up (with a time lag of about a year). But the bad news is for those currently employed (the majority) who have been given a breather by the extremely low interest rates set by the central banks.

If you have an adjustable-rate mortgage (also known as a variable mortgage), your mortgage payments will have fallen as the central banks cut rates. But the minute the economy starts to grow again, rates will start to rise to head off the threat of possible inflation (in the 2001 recession, the Fed left rates low too long, which caused the current crisis - they won't want to make that mistake again).  Many people who were struggling financially in 2008 breathed a sigh of relief when interest rates were cut - the cuts freed up income to enable them to meet the payments on other debts. But once the central banks start raising rates, the mortgage payment will go back up, and credit card companies will use the excuse to hike their rates even further.

Therefore it's vital to use the current breathing space to get out of debt now.   How long will the breathing space last? Rates should start to head back upwards at the start of 2010. So we have at most about eight months to clear as much debt as possible so that when rates start to rise we arn't affected too badly.

Start to clear credit cards first, and then move onto reducing your mortgage, making overpayments if the terms of your contract allow it. It might be worth investigating remortgages on a low fixed rate - but the best deals are reserved for those with a low loan-to-value, which means most people will have to do some serious overpaying in order to get their loan down enough to qualify. Even if you can't get it down enough, it's worth doing something about the debts you carry. Doing nothing is the most risky option as you risk getting whiplashed when interest rates start hiking their way back to normalcy.