Brace yourself as Britain's big squeeze bites

Don't despair if tax changes and price rises are taking their toll, says Paul Bicknell, charities are on hand to help manage your problems

This month 49 new benefit and tax changes will push more people than ever into financial hardship, according to money education charity Debt Action. Meanwhile, hard-up parents who have a baby after the beginning of the tax year on 6 April will be at least £1,500 worse off due to the Government's cuts than they would have been a year ago, the Child Poverty Action Group warned.

Also this week, bean counters at PriceWaterhouseCoopers calculated that the average UK household will be feeling a £1,050 squeeze on their finances because of higher prices and new taxes.

John Hawksworth, PWC's chief economist, says: "Taken together with last year's fall in real household disposable incomes, this represents the biggest squeeze on real household incomes since the 1976-77 period."

With times getting tougher, more people will be pushed into the red and with banks being given the green light to continue with high fees for overdrafts by a shock court case in 2009, that could be the beginning of a debt spiral as charges begin to multiply.

"A common cause of complaint is that charges have snowballed – where the original charge leads to another charge and the consumer finds themselves in a cycle of debt," says Martyn James, a spokesman for the Financial Ombudsman Service.

Last week the service published its latest naming and shaming complaints data about individual businesses. Consumers are far more significantly likely to complain if they have lost money or in extreme cases are in financial hardship and unable to afford priority payments such as bills.

For banking and credit cases it revealed for the six months from 1 July to 31 December, Santander received the most complaints with 4,574 case files being opened. It was followed by Barclays with 4,067, then Lloyds TSB with 3,681, followed by Bank of Scotland with 2,691 and MBNA with 2,509.

"Currently, the ombudsman receives around 200 complaints a week where financial hardship is a factor," says Martyn James.

"Complaints about financial hardship can cover a wide range of financial products, though the majority of the complaints we see in this area are about charges and interest being applied to bank accounts or credit cards."

The knock-on effect, sadly, is that debt charities have never been busier. The Consumer Credit Counselling Service says that it helped more than 113,000 people repay debt through a debt management plan in 2010, a 10 per cent increase on the previous year. The charity says it now manages almost £3.6bn worth of unsecured individual consumer debt through the plans it arranges for struggling folk.

The charity is funded by creditors in the financial services industry.

"They often contribute 10 per cent of each consumer's debt in a debt management plan," says Una Farrell a spokeswoman for the service.

Meanwhile, another debt charity National Debtline says that from 1 January this year to 1 April it dealt with more than 36,000 individual callers to its helpline. In the 12 months following advice given by the charity in 2010, £300m will be repaid to creditors, it reports.

It also estimates that over the next seven years – the average time it takes a caller to repay their debts – approximately £2 billion will be repaid by those advised by it during 2010. The charities try to help people come up with solutions to repay their debts, rather than running away from them.

However, banks often continue to pressurise the poorest consumers with mail storm tactics, including notice of accounts being put into receivership and sending out court summonses. But their defence of such bully-boy tactics is that they contribute to debt advice charities.

"Banks will proactively ask consumers to get in touch with debt advice charities where it appears they are in a position of financial difficulty," says Brian Capon, a spokesman for the British Bankers Association. "But it is not just the banks people can get themselves into debt with; it may be a variety of other providers such as local authorities and store cards."

It is sadly still common for many high-street banks to offer credit cards or loans to those struggling to repay overdrafts. But such a move can in turn offer lead to greater charges and more debt misery.

Pressure from charities has encouraged some high-street lenders to take a more proactive approach to help those stunned with punitive charges.

"Consumer debt is rarely a problem confined to one specific lender," says James Thorpe, a spokesman for HSBC. "We fund the CCCS because it helps consumers look at their debts in the round."

He says the bank has a range of fee-free overdraft exemptions to protect those who, "very rarely go over their overdraft, go over by a small amount or act quickly to repay the borrowings."

HSBC does not charge consumers more than once a day and fees are capped at £150 per month, Thorpe says. "For the very small number of customers who regular go over their overdraft limit, we recommend they come and discuss our Bank Account Pay Monthly offering. This has a "hard floor", which means customers simply can't go overdrawn. Clearly this is not the solution to all of these customers, as unless they change their spending habits they will be charged by other suppliers or get county court judgements against their name for bounced council tax and bill payments."

The bank is the sixth most complained about financial services provider at the Financial Ombudsman Service on banking and credit with 1,574 complaints in the six-month period ending 31 December 2010.

"People do sometimes get into financial difficulty and we will work with our customers to get a clear understanding of their financial position and this will help us decide the best way forward," Sarah Bundock, a spokeswoman for NatWest & Royal Bank of Scotland.

"There are a number of ways customers can get into financial difficulty and we will always work with our customers to agree the best way forward, whether this involves setting up a repayment plan with us or assisting in other ways," says Bundock.

"We also work consistently with organisations such as Citizens Advice and Money Advice Trust, and continue to donate money to support them."

The Consumer Credit Counselling Service or National Debtline are good places to get an affordable debt repayment package set up if you are struggling. CCCS, for instance, provides no-fee debt repayment plans which allow you to repay your debts at a monthly payment you can afford.

Meanwhile, research by charity Turn2us suggests that many people aren't aware of the financial help that they may be entitled to through benefits. A staggering 89 per cent of people of low income earners don't know that in-work benefits, such as Working Tax Credit, are available to them – despite 44 per cent having had their working hours reduced and 48 per cent facing either a pay freeze or pay cut.

As the Coalition cuts begin to bite this month, the charity is running a Benefits Awareness Month to help people find out what cash they are eligible for. Go to www.turn2us.org.uk to find out more.

Debt case study: Repaying £40,000... at £1 a month

Ian Hurley is a 62-year-old actor who was once a spy in the hit Seventies TV series The Onedin Line. He also starred in a number of commercials in the 1980s including the first ever mobile phone TV commercial in the UK for Vodafone and also Worthington E Beer.

He is now in debt to HSBC to the tune of £40,000 but currently only pays them £1 a month to avoid bankruptcy. The payment was agreed following a debt management plan set up with the help of the Consumer Credit Counselling Service with the proviso that the amount will increase if Ian's fortunes improve.

The majority of debt was accrued on credit cards, he says. "All the stuff these banks send you – they can't follow through on it. And you tend to think, well, if they are going to clobber me for this I may as well max myself out."

But he found that a debt management plan has given him the chance to rebuild his finances. "They ask you to supply a simple statement of the amount of money you have got including income and outgoings and provide a diagnostic which is essentially a financial breakdown of what you can afford to repay," says Ian.

Debt in numbers

£1,050

The squeeze on the average household due to rising prices and taxes

4,574

Number of complaints against Santander made to Financial Ombudsman in last six months of 2010

£3.6bn

The amount of debt managed by the Consumer Credit Counselling Service

7

The average number of years it takes a CCCS caller to repay their debts

89%

The proportion of the low-income earners unaware of benefits like Working Tax Credit