How to get down from the credit mountain
Six million families are in a 'debt trap', as lenders continue to give them credit. Melanie Bien sees a way out for the hard-pressed
Sunday 25 April 2004
Obtaining credit has never been easier, as lenders fall over themselves to persuade consumers to take out ever more credit cards and personal loans. And even though six million families are in the "debt trap", according to the National Consumer Council (NCC), the industry was still claiming last week that there are "no indications that the number of people in financial difficulty has increased over time" - findings which have been condemned by MPs and consumer groups.
A report from the independent economics consultancy Oxera, on behalf of the Association for Payment Clearing Services (Apacs), the British Banking Association (BBA), the Consumer Credit Association (CCA) and the Finance & Learning Association (FLA), concludes that debt is a problem only for a minority of households.
But MPs, the Citizens Advice Bureau (CAB) and the NCC maintain that debt is spiralling out of control, and that lenders are partly to blame because they aren't acting responsibly.
Speaking at the BBA's annual conference last week, the consumer affairs minister, Gerry Sutcliffe, warned: "Consumers themselves have to take their share of responsibility when it comes to credit agreements, but there is a vital need for honest credit companies to ensure they are sharing the fullest possible information to avoid lending to those who are already struggling with credit."
He argues that lenders should communicate with each other to identify potential problems. "Alarm bells should be ringing if someone applies for a credit card and already has several credit cards - even if they are paying the minimum amount each month," he added.
Some credit card providers, such as More Th>n, already investigate whether applicants are overloaded with plastic and therefore not in the best position to take on yet another card. But this is not a wide-spread practice and not everyone thinks it is the solution to the problem, in any case.
"The idea that card providers sharing information on their customers' credit records will be an adequate solution to the issues around growing consumer debt is naive," says Stuart Glendinning, a director of moneysupermarket.com, a website that enables consumers to compare the cost of financial products. "Holding numerous credit cards is not necessarily an indication that consumer debt is spiralling out of control. More than half of all consumers pay off their balance in full each month, and therefore holding a number of cards can be perfectly acceptable for many people."
Mr Glendinning believes that better consumer education, in particular encouraging people to look around for the best deal, is the answer to spiralling debt.
Oxera's findings suggest, to quote from the report, that debt is "often a temporary problem for a household" and "most people are only in arrears for a relatively short period of time". "External shocks" such as redundancy presented the biggest threat to a household's financial stability, but most people "managed to get out of difficulty after some time".
However, the CAB says it is not always that easy to get back in the black: "Our research shows that we are at a critical stage where personal debt problems threaten to overwhelm large numbers of people. Usually, all it takes is a small change in their personal circumstances." And the NCC warns that "Britain is in the grip of a credit binge".
Consumers can help themselves by taking responsibility for their own actions. "The most important thing you must do is face facts," says Darius McDermott, the managing director at independent financial adviser (IFA) Chelsea Financial Services. "Don't bury your head in the sand and hope your debt will just go away, because it won't."
The action you take will depend on how much debt you have and what stage you are at. If you are receiving threatening letters from creditors, contact them immediately, explain the situation and try to come to an agreement that will allow you to make reduced payments each month. Many lenders prefer to do this rather than take you to court to recover their money, as they have more chance of getting it back.
If things have gone too far for this, contact the CAB or NCC (see details below). They will attempt to negotiate with your creditor on your behalf and offer advice on what your next step should be.
Of course, the best thing you can do is to deal with things before they get to this desperate stage. If you are starting to feel overwhelmed by your debt - perhaps you can only manage to pay off the minimum on your credit card balance each month, for example - it is time for some financial reassessment.
"Check on your spending, write down your incomings and outgoings, and look at sensible ways of making savings," advises Mr McDermott. "You really need to prioritise so you can get your debt paid off yourself, rather than use a debt management company, as this will cost more in the long run."
Philippa Gee, investments director at IFA Torquil Clark, warns consumers to be particularly wary of credit cards. "The credit card is not your flexible friend: you control it or it controls you," she warns. "If you can't repay the amount you borrowed in full by the end of the month you should do something about this."
If it is likely to take you several months to pay off your balance, choose a card charging 0 per cent interest for an introductory period. Halifax and Mint both charge 0 per cent on new purchases and balance transfers for nine and eight months respectively.
If you have serious debts, however, and are also a property owner, a further advance from your mortgage lender may be a good way of clearing your debts. "But this is a last-ditch solution, not one you can take advantage of repeatedly, as you only have so much equity in your home," says Ms Gee. "So make sure you don't run up debts all over again once you've done this."
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