Borrowers go full steam ahead for a debt iceberg

Repossessions and bankruptcies are rising, and many have no idea how much they owe. Esther Shaw sees how to avoid sinking
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Where debt was once no more than a tool to help people manage their finances, it's now in danger of taking them over.

Where debt was once no more than a tool to help people manage their finances, it's now in danger of taking them over.

Due to their high levels of borrowing, nearly 50 per cent of 26- to 40-year-olds in Britain would not be able to survive financially for a month if they lost their jobs, research from the Equifax credit-reference agency shows. And while many can at least turn to family or friends for short-term help to dig themselves out of debt, others won't have that safety net.

In particular, the number of people who have overburdened themselves and been forced to take out a debt-repayment plan, while still earning a salary of £50,000 or more, has doubled since this time last year, according to the Consumer Credit Counselling Service (CCCS).

The spectre of the UK as a nation of bad debtors looms closer. Property repossessions are at a 10-year high, and personal bankruptcies for the first three months of 2005 were up by a quarter on the same period in 2004, reports the Department of Trade and Industry.

Household debt in the UK has already broken through the £1,000bn barrier, and the real danger is that many of us can't see it. Credit-reference agency Callcredit warns that six in 10 consumers have no idea how much they owe.

There's nothing wrong with borrowing what you can afford to pay back - a point hammered home recently by Brad Cooper, head of store card supplier GE Capital, who argued that "debt is good" in helping the economy to grow. But taking on more than you can handle can lead to misery.

Who is to blame for all this indebtedness remains a moot point. Banks have a duty to act responsibly, but lack of data sharing between financial institutions on the creditworthiness of individuals, as well as dubious lending practices, can lead to many people borrowing too much.

Lloyds TSB came under the spotlight earlier this month when a BBC Real Story documentary exposed its failure to make sufficient checks. The programme focused on the case of David and Wendy Dickerson, who were lent £100,000 by the bank despite the fact that Mr Dickerson was claiming benefits due to ill health and Mrs Dickerson was earning just £5,000 a year; their debt was subsequently wiped clean.

Amid all this gloom, there is a flicker of hope: the reintroduction of the Consumer Credit Bill (see News, page 27) should offer greater protection for vulnerable consumers.

However, while it is easy to point the finger at reckless lenders, borrowers cannot absolve themselves from all blame.

"It's about responsible borrowing," says Nick White of the online price-comparison service uswitch.com. "Consumers must ensure they enter into credit agreements with a very clear understanding of the real costs."

Simple steps such as shopping around for a good rate on your personal loan - and avoiding payment protection insurance (see Ask Sindie, page 26) - can keep your costs down from the outset. Similarly, try to repay more than you absolutely have to each month on your credit card bill. The price-comparison website moneysupermarket.com warns that paying the minimum amount, often just 2 per cent of your outstanding balance, could mean you spend over 27 years clearing the debt.

If, despite your efforts, you are too deeply in debt to manage and have a number of creditors, you can get professional help from free advisory services such as Citizens Advice, National Debtline or the CCCS. They will help you analyse your debts and decide what to pay off first.

While a consolidation loan - lumping all your borrowings into one more manageable sum - may seem a good idea, it is not always the best solution. "As it will often take you longer to repay [one bigger debt], you may end up paying significantly higher interest charges," says Mark Ward, head of consumer affairs at Callcredit.

If you have particularly large debts, you could consider an individual voluntary arrangement (IVA). This is a legally binding agreement, made with your creditors, under which you agree to pay back a set proportion of the money you owe, usually in monthly instalments. These affordable payments are based on the person's income and expenditure, and creditors agree to waive interest on debts.

Cleardebt.co.uk - an online firm that helps people set up these arrangements - says that over three quarters of those who contact it for help owe more than they earn in a year. Over a quarter have unsecured debts greater than two years' pay.

"It's almost as though younger debtors think that in time, maybe with a new job or pay rise, the problem will go away," says founder David Mond. "But at the levels of debt we are seeing, this is unlikely."

Bankruptcy is the absolute last option, putting a six-year black mark against your credit reference that will affect your ability to take out a mortgage, buy on credit or even get a job.

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