Past Articles for May, 2006

Its five tips are aimed to stop people from resorting to bankruptcy as consumer credit becomes easier to obtain and debt levels grow.

“Modern society seems to find personal debt more acceptable than was the case in the past. But sooner or later the bill will arrive and has to be paid, with interest,” said John Davies, head of business law at ACCA.

“More of us are finding that it is all too easy to hand over a credit card in payment and forget that a bill from the credit card company will shortly be landing on our doormat.”

Tips from the ACCA include: budget so that spending does not outstrip earnings; get into a saving habit; be wary of taking on more debt or credit; shop around for credit deals; and face up to debt and discuss it with lenders if it becomes a problem.

If bankruptcy does loom, the Individual Voluntary Arrangement (IVA) is recommended as a “middle ground” that avoids the more serious effects of going bankrupt.

In addition to these tips, the ACCA recommends that those in debt contact professionals for advice.

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Financial drains such as mortgages, utility bills, taxes and credit card debt cost the average Briton £954 every month, yet monthly take-home pay is only an average of £1,070.

“Millions of Brits are living on the edge by failing to protect the lifestyles they have become accustomed to,” warned Nigel Brittle at Combined Insurance which conducted the survey.

Rising fuel bills and council tax hikes are the most likely reasons for the large amount of monthly commitments.

However, unsecured debt adds a great deal to the problem: loans and plastic debt are an average of £152 per month, with men the worst for credit card debt as they have to pay £204 each month.

Where someone lives also affects debt levels; Londoners pay the most for everything from mortgage repayments (£626) to utility bills (£212), whilst the Welsh only paid £144 for their utilities.

As the cost of living rises, Mr Brittle urged consumers to take out payment protection insurance (PPI) to ensure that debt is still serviced in the event of injury or unemployment.

David Mond, ClearDebt chief executive, agreed that in principle payment protection insurance could make a difference between living with debt and failing to cope. However, he felt the expense of the product often made it an unattractive purchase for consumers.

He said: “The £27 weekly surplus indicated by this report could be demolished by adding payment protection insurance to every credit card or loan payment – many credit providers see provision of this product as a licence to print a bit more money. PPI premiums vary significantly according to the commission the lender takes. People should shop around.”

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The charity says that debt levels have risen by a third amongst its clients since 2003, so that the average is now £13,153 – 17.5 times their average monthly income.

“For many there is little prospect of their income increasing or their circumstances changing,” said CAB chief executive David Harker.

“The reality is that they are condemned to a lifetime of poverty overshadowed by an inescapable burden of unpayable debt.”

Worst at risk were those with low incomes, whom Mr Harker said were usually badly informed about loans and got themselves into debt through a lack of financial knowledge.

But debt resolution experts ClearDebt believes many could find a route out of debt using an Individual Voluntary Arrangement (IVA), rarely recommended by CABs.

“Many debtors fail to realise they are insolvent and therefore eligible for an IVA which can reduce the total required to be repaid very significantly and which also freezes interest at the outset, usually sharply, reducing the amount debtors need to repay each month,” says ClearDebt chief executive, David Mond.

“Some advisors are also wary of recommending IVAs to lower-income debtors because the fees taken by IVA arrangers can make either passing or repaying a tough prospect,” he added.

“The exceptionally low fees taken by ClearDebt makes anIVA a realistic proposition for debtors who owe as little as £7,500 - typically, ClearDebt IVAs reduce debt by half.”

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The study for Equifax showed that 53 per cent of students want the current ban on the Student Loans Company sharing information with commercial providers to end.

“By putting student loan information on credit files we could be giving graduates a head start, by helping them gain an overview of their debts in order to manage their finances in the future, as well as giving lenders a credit history to use to help them make responsible lending decisions,” said Neil Munroe, Equifax external affairs director.

Earlier this month, Callcredit warned that graduates could be given loans they cannot manage or be refused loans because of a lack of information on student loans.

Mr Munroe said that sharing of information could be a positive act for graduates as it would show they had a credit history and help them manage their finances.

Sharing information with lenders means that graduates are more likely to get a fairer assessment for credit, preventing many from taking on debt they cannot handle.

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Research for loans company cahoot shows that 39 per cent of Britons owe money to family or friends, totalling £65 billion.

John Goddard, managing director of cahoot, said that while borrowing from family was common, it had its dangers: “Problems can start when people start to borrow large amounts of money in addition to personal loans, overdrafts and credit cards because this can put a huge strain on monthly budgets and on personal relationships.”

With Britons already estimated to be £1.1 trillion in debt at an average of £4,000 per person, this new study adds another £3,704 to personal debt levels.

However, Mr Goddard told people not to regard loans between acquaintances to be seen as an easy option.

One in ten people told cahoot that they had fallen out with friends because of loans; a quarter had to repay debt with favours; and a tenth said that the original loan necessitated others to borrow money.

Despite Polonius’ warning in Hamlet “neither a lender nor a borrower be”, it seems that many are, leading to arguments and resentment as people struggle to manage debt.

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MyCallcredit says that even though debt is seen as a “taboo” by many, it should not prevent people struggling with debt taking action before their lives are affected.

“People need to manage their finances and prioritise their debts to make sure their homes are not at risk and they don’t feel the only option left to them is bankruptcy,” said MyCallcredit director Alison Nicholson.

“Bankruptcy stays with someone for life and is by no means an easy option.”

Her warning comes as official figures show that the number of bankruptcies has reached new highs, something that stays on a person’s credit record for at least six years.

MyCallcredit recommends that people admit they have a debt problem, answer “red letters”, contact creditors and keep an eye on debts.

“Bankruptcy will usually mean you lose your home, if you are a homeowner,” says ClearDebt’s David Mond.

“It leaves a big black mark on your credit rating for six years and it is difficult to rebuild your financial reputation afterwards.”

He added: “However, for those with few assets and a big debt to income ratio, bankruptcy can still be the best option. Debtors need to get specific, individual debt advice.”

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According to a study by the Alliance & Leicester, those who use online banking have a clearer financial picture as 44 per cent check their account at least twice a week, compared to three per cent who use face-to-face banking.

“You can keep track of your in and out-goings which means you have a clearer idea of where you stand and so can easily avoid going into the red by mistake,” said Helen Palmer, manager of Alliance & Leicester current accounts.

“As such, you can check your account at the click of a button and manage your money more effectively.”

Internet banking has surged in popularity in the UK, with a 63 per cent rise in online use since 2003.

Logging onto internet bank accounts also gives 24 hour access to the current state of finances, added Ms Palmer, praising the convenience of such a system.

With the Office of Fair Trading saying that it will not impose limits on overdraft charges, easy access to bank details means that many can help avoid incurring debt and stay in control of their finances.

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Research for IFA Promotion shows that less than a fifth of Britons have savings stored “for a rainy day”, with 43 per cent being forced to turn to families for help.

David Elms, chief executive of IFA Promotion, commented: “Our research has already revealed some alarmingly blase views on balancing our spending, saving and debt; but without even a basic savings safety net, millions of us risk the possibility of being plunged from indulgence into hardship.”

Despite this lack of savings, spending and debt, particularly credit card debt, is reaching new levels, with the average Briton £4,000 in debt.

However, IFA Promotions warns that an interest rate rise could be on its way which could severely affect those with loans and mortgages.

Worryingly, five per cent surveyed said they would take on more debt to try and get themselves out of a financial crisis, while 15 per cent of women have no idea what they would do if one hit.

With a risk of debt becoming more likely and a lack of financial planning apparent, Mr Elms called for people to take on financial advice and to start saving.

David Mond, chief executive of debt experts, ClearDebt, commented that it was rarely wise to borrow your way out of trouble: “Unexpected financial crisis is one of the most common reasons people fail to manage their debt.

“Extra borrowing is rarely the answer. Instead, not only should people save, they should ensure they should borrow prudently.

“Imagine your monthly payments doubling,” added Mr Mond. “If you could not still afford to pay then you are too deep in hock.”

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The Consumer Credit Counselling Service (CCCS) has published a report on lifestyle spending after it saw a 257 per cent rise in calls for advice from those earning over £30,000 since 2003.

Helen Saxon of the CCCS, the report’s lead author, said: “Much of the problem in this group can be put down to a drive to maintain an image of affluence. In theory, a take-home income of £30,000 a year should be enough to allow most families to manage.

“But large mortgages, rising school fees, keeping up with the Joneses and the increasing availability of credit have made debt a normal part of life for many of the middle class.”

According to the CCCS research, those earning more than £30,000 ran up an average unsecured debt of £70,000, while homes with a net income of under £10,000 only had an average of £20,000 of unsecured debt.

Britain’s middle-classes are further in debt because lenders are more likely to give loans to those earning more, the report saying that they are seen as a low-risk group.

With this report based only on the amount of people who have asked for advice at the CCCS, the real debt problem could be even worse as people pursue a luxury lifestyle.

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Research carried out by YouGov, on behalf of Thomas Charles, found that a fifth of the population has over £10,000 of unsecured debt.

James Falla, director of Thomas Charles, commented on the survey: “Compared to even just a few years ago, we can see the enormous uptake of unsecured debt across all areas: credit cards, personal loans, student loans.”

He warned that if interest rates or unemployment rises, individuals are at risk of loss of income which will worsen their debt levels.

According to the new debt study, 78 per cent of people had a credit card and a fifth of those had credit card debt over £5,000 on them; while two thirds of adults have an unsecured loan.

With debt levels rising, Mr Falla warned that unsecured debt was damaging the health, relationships and work of people who were having difficulty repaying.

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