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The Debt Bubble

Up and down the country we are hearing about rises in petrol costs, banks pushing up their lending costs, increased council tax prices and energy bills.

This is cause for concern for consumers.

Wage rises are restrained to 3.8% so do not counteract the pressure of inflation.

Banks believe they needed to increase their lending costs and bank charges to keep up with the rising costs of covering bad debts. They have also declared that they are tightening the reigns regarding their lending criteria. However, Vince Cable, the Lib Dems Treasury Spokesman, blames banks lending practices for the rise in insolvencies.

‘There is currently a considerable degree of irresponsible lending and aggressive marketing to individuals of personal loans and credit. Lenders have an obligation to stop these practices and provide greater levels of debt advice.’ ‘With interest rates rising last Thursday, families are likely to feel a further pinch on their budgets, leading to further increases in individual insolvencies.’

I partly agree with Vince Cable, but it isn’t high street banks alone.

People have access to numerous companies who hold consumer credit licences, which authorise them to lend you money.

It is currently up to that individual company to determine the criteria which will decide whether they believe you meet their requirements to lend you money. Some creditors will consider your income to decide what they will lend you without taking into consideration other financial commitments and whether you would still be able to repay your debt should an unforeseen event happen.

Figures from the DTI released on Friday, showed a record 26k people became insolvent in England and Wales during the second quarter of the year – a 66% increase in the same period in 2005. Mark Sands, director of personal insolvency at KPMG stated

‘We calculate that someone is entering insolvency every minute of the court’s working day”

Rises in Mortgage rates are also causing repayment difficulties for families. House repossessions are at their highest since 2001. CML director-general Michael Coogan said that the rise in interest rates last Thursday would add to payment difficulties for hard-pressed mortgage borrowers.

Although it is looking like things are going to get worse before they get better, James Eden, banking analyst with Dresdner Klienwort believes that things will improve by 2008. He believes this is due to banks tightening up their lending criteria. If banks become more choosy about who they lend money to, then things may filter to other companies whom may follow suit.

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Northern Rock 5 Year Deal

Northern Rock has signed a 5 year credit reference deal with Experian to purchase consumer credit reference information to support its lending activity.

Richard Barclay, director or credit at Northern Rock said

It is crucial that we have access to the most up to date information available in order to make the right decisions for both new and existing customers

The consumer credit reference information we receive from Experian meets this need and provides us with the ability to ensure accurate decisions are made

Experian will deliver the information to Northern Rock through its managed Link SM solution.

 

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Debt Of The Future

debt1.jpgWhen we look at the statistics of debt in the UK do we consider the effect this has on our everyday lives and country as a whole?

Britain’s personal debt is increasing by £1 million every four minutes

The total credit card debt in April 2006 was £56 billion!

39% of Brits overspend on their credit cards on day-to-day purchases

We read in the headlines 

UK smashes the £1 trillion pound barrier Britain in Debt Turmoil

It is clear that Britain is in debt, but just how much thought do we give to this and the implications?

We rely on businesses and businesses rely on us

A business provides jobs only as long as it is making a profit. In order to make a profit, a business needs sales. Without sales, there is no business and with no business, there are no jobs.

If Britian is a nation in debt, then surely businesses and households across the nation feels the effects. People can’t spend what they don’t have, and if people are not spending, then businesses are suffering.

Incredibly the number of people earning more than £30k a year asking for financial help has risen by 275% in the last 3 years!

Encourage and Educate

It is becoming clear that we need to be educated when it comes to our personal finances. We need to be encouraged to become fully aware of what we are getting into when we take out loans or spend on credit cards rather than get caught in the debt trap.

Because we cannot predict the future, we do not know whether we will be caught out or not, so it is essential we are bought round to the way of thinking that, if we can’t afford to pay for it now, then we should save up for it.

Of course, for many people it is too late for this kind of thinking, but not for our younger generations.

From our own experience, should we not be thinking of educating our young people ourselves regarding the implications of taking out credit if it all goes wrong? “You should have read the small print” didn’t quite do it for us.

29% of 16-14 year old said they would not know how to prepare and manage a weekly budget

62% of young people said if they got into money trouble, they would not be able to name any advice or support services they could turn to for advice

Bankruptcies among 18-29 year olds have more than doubled in the last 4 years!

Surely this spells something out to us?

Take A Stand Against Debt

Its great that we have Debt Management Companies such as Payplan to turn to when we find ourselves struggling with our financial situation, but wouldn’t it be better if there wasn’t a need for companies such as these?

debt3We could continue to blame the creditor for their lending systems which seem to make obtaining credit easy, and the Government for allowing so much advertising of credit, but once we have experienced financial difficulty ourselves and know the implications, then it is up to us to do something about it and educate and empower our younger generations to not follow in our footsteps.

Getting Somewhere

The good news is, according to MP Melanie Johnson, the Financial Services Authority (FSA) are working wth the Department for Education and Skills, the main curriculum agencies and other organisations to help teachers deliver personal finance education.

The Personal Finance Education Group (PFEG), funded by the FSA and the Department for Education and Skill, aim to promote and facilitate the education of all UK school pupils about financial matters.

The Department for Education and Skill’s guidance suggests that schools teach:

The Solution Before The Problem

It is encouraging that the focus to educate young people is in the pipeline, however, surely the questioning of how much freedom creditors have to advertise their services should be addressed also?

Daytime TV is full of advertising for loans and credit cards, and if that wasnt enough, how many letters do you get through your door? These are real areas of concern that need to be taken into consideration.

If things continue as they are, then the nation will feel the effects. More and more businesses will fail and more and more people will be put out of work. debt10It is imperitive that the Government looks at the whole picture as well as looking at finding ways to enable people to deal with existing debt.

The Government needs to take a long hard look at the whole credit lending system and the freedom of advertising credit and to change the way people think when considering taking out credit to realise the implications should things go wrong.

Over indebtedness not only affects your finances, but also has a great emotional impact on your life. We cannot rely on the Government alone to deal with it, we need to take a stand ourselves and stamp out debt in our nation by teaching our young people the wisdom of looking after their finances.

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0% Balance transfers

American Express announced earlier this week that they are going to stop offering 0% balance transfers to its new customers (read full article). 0% balance transfer cards are a popular choice when people are struggling to make the repayments on their existing credit card, but are they as good as they sound?

Transferring a balance to a 0% deal can save money and is considered to help a debtor become debt free. On a 0% deal no interest is paid until the deal runs out so if the debtor can repay the outstanding balance within that time they won’t pay any interest. It sounds like a great deal doesn’t it?

However these deals only work if at least the minimum payment is made, otherwise penalty charges may be incurred. Also they are only beneficial to those who can clear the balance before the deal expires. Once the interst free period has ended the standard rate will apply, which in many cases, is extremely high. So should there be an outstanding balance on the card, the monthly interest charges can quickly accumulate. This is avoided by many transferring their balances again to another 0% deal, people who do this regularly are known as ‘rate tarts’ and are thought to be costing the card issuers over £1bn a year.

In contract 0% deals can actually create a debt problem, or worsen it. Many who transfer their balance move it to a 0% card with a higher limit than the balance. A higher limit means a debtor may be tempted to spend more on their credit card, which can result in more debt. The 0% deal only relates to the transferred balance and the ‘purchase rate’ is often much higher. Lenders also automatically use the debtor’s monthly repayment to pay off the cheap balance transfer debts first. So interest, at the higher rate, is added to the amount spent on the card and quickly mounts up, as only a small amount of the balance is being repaid each month. Also some lenders only allow 90% of the debtors credit limit to be transfered, so 10% of the balance can still be incurring high interest.

As explained a debtor may actually incur more interest by switching to a 0% deal if they fail to clear the balance within the time limit or they can’t resist the urge to spend more on their credit card. If the 0% deals aren’t available long enough for the debtor to repay the balance, American Express and other lenders offer an alternative. Low ‘life-of-balance’ transfer rates, mean the debtor will benefit from a low interest rate until the balance is cleared. This rate doesn’t apply to ‘purchases’ which usually results in higher interest. Higher interest can be avoided by cutting up the card once the balance has been transfered. The ‘life-of-balance’ transfer removes the hassel of having to transfer the balance again when the deal expires.

Transferring balances is very common and often seen as the best way of solving debt problems but should the debts become unmanageable there are alternatives. Payplan offer free, impartial debt advice and may be able to provide solutions that result in interest being frozen.

Debt management plans

Individual voluntary arrangements

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