Your Money: Debts and how to squeeze them

Consolidating several lines of credit may seem a good idea, but look carefully, says John Andrew
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The Independent Online
There it was, as if to answer a prayer, a large advertisement in a tabloid newspaper, surrounded by smaller promotions offering Tarot readings and the services of clairvoyants on premium phone lines: "Make a fresh start: pay off all your existing loans, credit cards, H.P. etc. with cash over to spend."

The consolidation of debt - that is, taking out a loan and repaying all lines of credit - theoretically makes sense. With some store cards charging interest rates of over 30 per cent, it is prudent to repay the balance with another line of credit costing about half as much.

Borrowing to repay debts was once frowned upon, but today people are being actively encouraged to do so. Some promotions are only directed to devotees of plastic. The mailshots and press adverts give the rates charged by selected competitors and compare this to their rate.

Some offer a special low rate of interest for 12 months on all outstanding balances on the card. Others restrict the promotional rate to sums transferred from other cards, while others slash 5 per cent off balances transferred.

The promotions certainly can be beneficial. Naturally, read the details of the offer carefully. Card issuers are commercial and not philanthropic institutions, so don't just be attracted by the low initial rate - make sure you note the rate to which it will rise afterwards.

If the promotional rate only applies to balances transferred from other cards, you may not feel the deal is as attractive as it first appears. Also watch out for any "clawback" of the reductions to transfers if you don't want to be tied to the card.

If you transfer all your debts to a single card, you have to be self- disciplined to make it really beneficial. To avoid a spending spree with cards which have a zero balance, cut them in half and send them back to the issuers.

The decision to consolidate several lines of credit into a single loan is not so straightforward. One should certainly be very cautious of any sales patter that paints an idyllic view of such action.

If told that by consolidating your sundry indebtedness you can reduce your monthly payments and have a capital sum to spend, examine the figures. It may certainly sound like a case of "having your cake and eating it", but there is a price to pay.

Take the case of Kate. She had five credit cards and the total outstanding had crept up to pounds 4,000. The minimum monthly payments then totalled pounds 200. Kate found this level of repayments cramped her lifestyle, though the minimum required monthly sum would have reduced with each payment had she not used her cards again.

If she tried hard, she could probably have cleared her card debts in just over a couple of years, and would have paid around pounds l,200 in interest. However, on making inquiries about an advert for loan consolidation, she learnt that she could repay all the money on her cards and receive a further advance of pounds l,000, and only pay pounds l20.85 a month.

The interest rate looked fine - an APR of just 16.9 per cent, which was less than the rate on her cheapest card. Having pounds l,000 to spend clinched the deal.

What Kate did not appreciate was that the loan was payable over five years. She would therefore make 60 repayments totalling pounds 7,251, including interest of pounds 2,251. The reduced monthly commitment was to some extent a result of a lower interest charge, but was mainly due to a longer repayment period.

Debt consolidation is not suitable for everyone. Instead of being the route to a fresh start it could be the first step of a spiralling period of perpetual indebtedness with larger sums being borrowed over ever-increasing timescales.

If your finances are reasonably sound, but you want to pay off your indebtedness, consolidation and having a cash reserve makes sense. This is providing you have the will power to resist further spending on credit. Aim to make the highest repayments that you can comfortably afford so as to reduce your total interest charge.

Should you be in financial problems, consolidation is not the best solution. Instead you should seek guidance from your local Citizens Advice Bureau or your local authority debt advice centre. They can probably persuade your existing lenders to waive your interest payments. When you are in difficulties, zero interest is better than any promotional deal any dayn

Mortgage specialists can help put your past behind you

In 1992, Mark and Elizabeth took a fixed-rate mortgage with Nationwide. The following year their son was taken seriously ill and Elizabeth gave up her job to give him the 24-hour care he needed. The loss of her earnings put a strain on finances, so the couple immediately approached Nationwide and agreed a reduced monthly payment. Unfortunately they also fell behind with a personal loan.

However, thanks to Mark's promotion at the company where he has worked for 18 years, he received a substantial salary increase. The following year they managed to pay back all the money they were in arrears. Last year their finances were sufficiently improved to contemplate moving nearer Elizabeth's family. Matters moved quicker than they thought; they had a good offer for their house and they were offered a substantial discount on the bungalow they had seen - providing they could complete within a month.

Mark's salary was now double its 1992 level, they could provide a 25 per cent deposit and their financial difficulties were behind them, so they envisaged no problems when they approached the Nationwide for an extra pounds 26,000. Because of their past blip, however, the society was not prepared to advance any more. Mark even wrote to the chief executive to plead his case, but to no avail.

The Woolwich also did not want to know, while Barclays, the couple's bankers for 20 years, needed three weeks to consider their application for a mortgage. In desperation, Mark visited an independent financial adviser who sent him to the Kensington Mortgage Company, specialists in non-status mortgages. The finance was arranged in time.

As the couple's past problems were considered low risk by Kensington, they are paying 3 per cent over Libor. This will be reduced to a 2 per cent margin when the first year's payments have been successfully completed and to 1 per cent at the end of the third year. Not surprisingly, both Mark and Elizabeth are upset that neither their building society nor their bankers were prepared to help because of a past temporary problem. The Nationwide also charged them pounds 2,500 for the early repayment of their mortgage. Their son still needs 24-hour care, but is comfortablen

Where to find out more ...

Riverside Associates is a mortgage packager based in Liverpool. Tel: 0990 133 470.

Kensington Mortgage Company specialises in all non-status mortgages. It only deals with clients via independent financial advisers to whom a commission is paid. For more information, Tel: 0345 99 66 99.

The Mortgage Business specialises in mortgages for the self-employed and clients who have difficulties certifying their income. Tel: 0345 253 253.

John Andrew

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