Caution Needed Over Credit Card Debt

Financial solutions company Think Money has welcomed figures suggesting that more consumers are relying on debit cards rather than credit cards to fund day-to-day purchases, saying that it represents a greater awareness amongst consumers of the need to avoid excessive debt in the midst of a recession.

It added that while credit cards can be a useful means of funding some purchases, consumers should be careful about how much debt they incur as the economic downturn continues.

Figures from UK payments association APACS showed that in 2008, debit card spending rose by 9% to Pounds Sterling 245bn, up from a total Pounds Sterling 224bn in 2007. By comparison, credit card spending rose by only 1.6% – Pounds Sterling 126bn in 2008, up from Pounds Sterling 124bn in 2007.

Of all purchases made using cards, debit cards accounted for three quarters of transactions in 2008, according to the BBC. Meanwhile, the use of cheques fell by 10.4% compared with 2007.

The figures from APACS also show that the number of debit cards in circulation overtook credit cards in 2008. In 2007, there were 72 million debit cards and 73 million credit and store cards in circulation. Last year, there were 75 million debit cards and 71 million credit cards in circulation – further evidence that consumers may be becoming less reliant on credit as the economic crisis continues.

A debt expert for Think Money said: “We have already seen evidence that the credit crunch and economic crisis has caused many people to rethink their spending habits – for example, increased profits for ‘budget’ stores such as Lidl and Aldi, and a falling trend in overall retail sales. The shrinking usage of credit cards may be another indicator of changing attitudes amongst consumers.

“Used correctly, credit cards can be very helpful – as an emergency source of cash, for example – and some people prefer to use credit cards to make most of their purchases, as many include free purchase protection insurance.

“However, it’s important to remember that a credit card purchase is a debt from the day the purchase is made, and as such borrowers need to ensure that they stay on top of these debts. A lot of debt problems occur due to people falling behind with their credit card repayments, and the fact that the APR on credit cards tends to be higher than other forms of debt means that the debts can grow very quickly.

“We advise that credit cards should be used in moderation – perhaps with a low credit limit – but ideally, for people looking to limit their chances of falling into debt, it’s often a good idea to stick exclusively to debit cards if possible.

“Overdrafts on debit card accounts are often just as useful as a credit card, and the interest rate is often lower, so this may be a preferable option for some people.”

However, the Think Money spokesperson added that much of the reduction in credit card spending may be due to existing credit card debts.

“In times like this, it’s especially important that any existing debts are being taken care of. If someone becomes unemployed or experiences a reduction in their income, their ability to repay their debts can be severely affected, so it makes sense to tackle them early.

“We advise anyone struggling with existing debts to speak to a professional debt adviser, who can discuss the options available to them.”

Useful Resources for Editors:

Think Money website: http://www.thinkmoney.com/

Debt Management section: http://www.thinkmoney.com/debt/debt-management/

Debt Consolidation section: http://www.thinkmoney.com/debt/debt-consolidation/

IVA section: http://www.thinkmoney.com/debt/IVA/

Trust Deeds section: http://www.thinkmoney.com/debt/trust-deed/

One house repossession every ten minutes

New figures from the FSA report that there is one mortgage repossession approximately every ten minutes.

A mortgage expert for Think Money commented: “In an economic downturn, it’s to be expected that repossessions will rise, but homeowners should be aware that there are often things they can do to reduce the chances. First and foremost, we advise them to contact their mortgage lender and explain their situation.”

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Economy still uncertain despite base rate cut

Debt management company Gregory Pennington (www.gregorypennington.com) have warned that the economy remains uncertain, despite a number of signals suggesting a potential recovery, and have advised anyone facing severe financial problems to seek professional debt advice as soon as possible.

The Bank of England Monetary Policy Committee’s announcement on Wednesday that the base rate would fall to 4.5% was intended to calm fears surrounding the money market and increase lenders’ willingness to do business with one another, subsequently increasing liquidity and boosting the loans market.

A number of lenders announced cuts to their mortgage rates following the base rate announcement – which may come as a relief to prospective homeowners or existing homeowners looking to remortgage, following many lenders’ reluctance to respond to the last base rate drop.

Meanwhile, petrol prices recently fell to as little as 103.9 pence per litre, while food price growth slowed by 0.2% in September, according to the British Retail Consortium (BRC) – arousing speculation that overall inflation has hit its peak and will now begin to slow.

However, a spokesperson for Gregory Pennington commented that while there are encouraging signs for the economy, there is no guarantee that further difficulty for the economy can be avoided.

“The first thing to bear in mind is that while the base rate cut is intended to help the economy, it was brought in as an emergency measure,” she said. “The threat of a severe economic downturn is still looming and there are no guarantees it can be avoided.

“The fall in oil and food prices are very encouraging, but both are heavily affected by external factors, largely outside our Government’s control.”

The debt management company spokesperson was keen to emphasise the continued need to take care over finances and manage debts effectively in the coming months. “There is still the possibility that things could get tighter in the near future, so it pays to tackle any financial issues now, rather than waiting to see what happens next.

“People who are struggling with debt are especially at risk, because their finances are already stretched – and any further rises in costs of living could make those debts unmanageable.

“As always, we advise anyone struggling with debt to seek expert debt advice as soon as possible. Leaving it too late could allow your debts to grow, which is particularly dangerous if costs of living do continue to rise.

“There are a number of debt solutions to help with various financial situations. A debt management plan is a flexible means of getting out of debt in which your repayments are based on how much you can afford, and in some cases interest and other charges can be frozen.

“Debt consolidation involves grouping your debts into one convenient monthly payment, therefore simplifying your finances, and your debt can also be spread out over a longer period of time, meaning monthly payments are smaller – although this can mean you pay more interest in the long run.

“For more serious debts of over £15,000, an IVA (Individual Voluntary Arrangement) might be more appropriate. These work by agreeing with your creditors to make payments based on what you can afford for a period of five years, after which the remaining debt is considered settled.”

Economic crisis calls for fast action on debt

Responding to the International Monetary Fund (IMF)’s report suggesting that the global economic slowdown is likely to worsen and spread to more economic sectors, Debt Advisers Direct have warned the public that extremely testing times may be ahead, and people should look to get their finances in order and clear any debts as soon as possible.

In their new Global Financial Stability Report, the IMF have warned of “growing turmoil”, saying that the state of the global economy has worsened since its last assessment in April 2008. They also said that Governments’ willingness to act would be crucial in “bringing about a return to stability in the international financial system”.

Although the global economic crisis has so far been mostly limited to the financial sectors in more developed economies, the IMF warned that may soon be about to change, with other sectors and developing economies likely to be affected in the future.

A note on the IMF press release said: “financial institutions in emerging markets, which until recently remained fairly resilient, will be confronted with a much more challenging economic environment: A combination of global credit tightening, and economic slowdown, which could accelerate a downturn in the domestic credit cycle in some countries. Those economies with greater reliance on short-term flows or with leveraged banking systems funded internationally are particularly vulnerable.”

A spokesperson for Debt Advisers Direct said that the threat of financial hardship applies to everybody – not just people on lower incomes or those already in debt.

“The nature of the economic crisis is that many peoples’ jobs are at risk, and that applies just as much to people earning high incomes as it does to low earners. At the same time, many costs of living such as food and energy are still on the rise, so most of us are likely to feel the squeeze to some extent.

“For that reason it’s essential that anyone who is currently struggling financially, particularly those struggling with debt, seeks the relevant advice as soon as possible.”

The Debt Advisers Direct spokesperson added that there are a range of debt solutions available to help people in various financial situations. “For those with a number of debts, a debt consolidation loan could be the answer,” he said.

“Debt consolidation involves grouping all of your debts into convenient single monthly payments. It can also reduce interest rates if you are consolidating high-APR forms of credit such as credit cards, and it can allow you to reschedule your payments over a longer period, making your monthly payments lower. However, this may result in paying more interest in the long term.

“Alternatively, for those who want a less formal debt solution, a debt management plan can reduce your monthly payments to an amount you can afford, as well as freezing interest and other charges.

“Or for people with debts of over £15,000, an IVA (Individual Voluntary Arrangement) is an alternative to bankruptcy which could help you keep your home and other assets.”

The spokesperson added: “Above all, it’s very important that anyone struggling with their debts seeks the appropriate advice immediately, because it’s very possible that things are going to get even tighter in the coming months.”

Experts welcome base rate cut

Responding to the half-point cut to the Bank of England’s base rate, financial solutions company Think Money (http://www.thinkmoney.com) welcomed its already noticeable impact, and pointed to the implied likelihood of future cuts.

“There’s no question that we’re facing extraordinary issues today, both globally and nationally,” a Think Money spokesperson commented. “As a company, we were pleased to see the Bank of England taking this step – not just dropping the base rate, but dropping it by a substantial amount.

“Furthermore, we’re delighted to see major mortgage providers passing that reduction on to consumers. After so many months of negative news, this could make a big difference to many homeowners’ financial circumstances, as their variable rate mortgages drop from 7% to 6.5%.”

Anyone with a tracker mortgage, meanwhile, is sure to enjoy lower payments at once: The Times predicts immediate benefits for around 4 million people paying home loans that track the Bank’s base rate. ‘Those with a £150,000 mortgage’, it reports, ‘will see their interest-only repayments fall by £63 a month’.

“The same goes for other kinds of credit,” the spokesperson continued, “from secured loans to credit cards: people with tracker deals will certainly profit from the cut, and borrowers with SVR deals will be following their lenders’ reactions closely.”

New fixed-rate loans could also drop in price. “Now that the cost of credit has come down, lenders will be able to pass the savings on, giving their customers a better deal without placing their own profits in jeopardy – something which could have a profound impact on their stability at a time like this.

“Looking beyond the actual cut,” the spokesperson stressed, “it’s equally important to consider the implications – not just what the deal means, but what it says about the Bank of England’s assessment of our economy. First, the cut reveals how seriously it is taking today’s financial troubles. Second, it implies that the Bank is feeling more comfortable about inflation.”

As stated in the Bank’s news release about the rate cut: ‘The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability’.

“In other words, today’s financial crisis has become more of a threat to the nation’s GDP – but on the plus side, slowing growth does tend to slow inflation too. The Bank may well have liked to postpone the base rate cut until inflation came down closer to the 2% target, but given the choice between letting the economy deteriorate and losing some ground in the fight against inflation, it chose the latter.”

As for the months ahead: “The latest BRC-Nielsen Shop Price Index (SPI) for the UK reveals that annual shop price inflation shrank to 3.6% in September, down from 3.8% in August. It’s encouraging to see inflation on the way down, particularly as it gives the MPC more leeway when it comes to future base rate decisions. Various influential bodies are calling for the Bank to make further cuts to the base rate – and there’s reason to hope it’ll be able to do that.”

ThinkMoney.com welcomes BoE move

Responding to the Bank of England’s recent changes to its policy regarding collateral, mortgage provider ThinkMoney.com welcomes the move and looks forward to the increased levels of liquidity it should provide.

On 3rd October 2008, the Bank of England announced that it would expand the range of assets it deems acceptable collateral for the loans it grants to financial institutions. The range, according to the Bank of England website, now includes ‘AAA-rated asset-backed securities of some corporate and consumer loans; and approved highly-rated, asset-backed commercial paper programmes, where the underlying assets would be eligible if securitised’.

This action, the website continues, ‘is addressed to the ongoing strains in term funding markets, and adds highly-rated corporate securitisations to the residential mortgage securities that are already eligible’.

“At Think Money, we welcome this change,” said a spokesperson for the financial solutions provider. “While some may feel alarmed that the Bank of England felt such a move necessary, it’s nonetheless reassuring to note that the institution is taking such action before the financial situation deteriorates further.

The current lack of liquidity is a cause of great concern for everyone in the UK, from individuals to banks, mortgage providers and other institutions. “Without a constant, reliable flow of credit, it can be difficult – if not impossible – to carry out their plans, whether it’s a case of a company pursuing a business opportunity or an individual securing a mortgage, remortgage or loan.

“So we’re encouraged to see the Bank taking decisive steps such as this. Banks and other financial institutions own massive amounts of debt these days, from mortgage debt to overdraft debt, so it’s both limiting and frustrating when they can’t use them as collateral, as it’s one of the cornerstones of today’s lending activities.”

According to the Market Notice published on October 3rd, The Bank of England ‘will continue to hold extended collateral three-month long-term repo open market operations (OMOs) weekly up to and including the scheduled long-term repo operation on 18 November’, which suggests that it sees no immediate end to today’s unusual market conditions.

Furthermore, it states that ‘The size of the funds offered at the Bank’s extended collateral long-term repo operation on Tuesday 7 October will be £40 billion’.

Yet despite the size of the operation, the spokesperson for the financial solutions company stressed, it’s important to note that this is no act of desperation. “In the light of the ‘bailout’ recently approved in the USA, it’s important to realise that this move by no means invites lenders to put forward‘toxic’ mortgage debts as collateral. The Bank of England may have broadened the range of assets it sees as acceptable, but it is not prepared to accept any form of collateral which isn’t of sufficiently high quality.”

Furthermore, the Bank of England is exercising a suitable degree of caution: “The Bank may be accepting a greater variety of assets as collateral,” the Think Money spokesperson concluded, “but it’s also valuing them correspondingly and offering, to quote the Financial Times, ‘as little as 60p in the pound for some foreign currency mortgage-backed securities’.”

Economy still uncertain despite base rate cut

Debt management company Gregory Pennington have warned that the economy remains uncertain, despite a number of signals suggesting a potential recovery, and have advised anyone facing severe financial problems to seek professional debt advice as soon as possible.

The Bank of England Monetary Policy Committee’s announcement on Wednesday that the base rate would fall to 4.5% was intended to calm fears surrounding the money market and increase lenders’ willingness to do business with one another, subsequently increasing liquidity and boosting the loans market.

A number of lenders announced cuts to their mortgage rates following the base rate announcement – which may come as a relief to prospective homeowners or existing homeowners looking to remortgage, following many lenders’ reluctance to respond to the last base rate drop.

Meanwhile, petrol prices recently fell to as little as 103.9 pence per litre, while food price growth slowed by 0.2% in September, according to the British Retail Consortium (BRC) – arousing speculation that overall inflation has hit its peak and will now begin to slow.

However, a spokesperson for Gregory Pennington commented that while there are encouraging signs for the economy, there is no guarantee that further difficulty for the economy can be avoided.

“The first thing to bear in mind is that while the base rate cut is intended to help the economy, it was brought in as an emergency measure,” she said. “The threat of a severe economic downturn is still looming and there are no guarantees it can be avoided.

“The fall in oil and food prices are very encouraging, but both are heavily affected by external factors, largely outside our Government’s control.”

The debt management company spokesperson was keen to emphasise the continued need to take care over finances and manage debts effectively in the coming months. “There is still the possibility that things could get tighter in the near future, so it pays to tackle any financial issues now, rather than waiting to see what happens next.

“People who are struggling with debt are especially at risk, because their finances are already stretched – and any further rises in costs of living could make those debts unmanageable.

“As always, we advise anyone struggling with debt to seek expert debt help as soon as possible. Leaving it too late could allow your debts to grow, which is particularly dangerous if costs of living do continue to rise.

“There are a number of debt solutions to help with various financial situations. A debt management plan is a flexible means of getting out of debt in which your repayments are based on how much you can afford, and in some cases interest and other charges can be frozen.

“Debt consolidation involves grouping your debts into one convenient monthly payment, therefore simplifying your finances, and your debt can also be spread out over a longer period of time, meaning monthly payments are smaller – although this can mean you pay more interest in the long run.

“For more serious debts of over £15,000, an IVA (Individual Voluntary Arrangement) might be more appropriate. These work by agreeing with your creditors to make payments based on what you can afford for a period of five years, after which the remaining debt is considered settled.”

Help the Aged: MPs Support More Help for the Elderly

Between 1995 and 2005, the average borrower’s outstanding debt trebled, but the 55-64 age range saw a sharper rise per individual than any other age range. So says ‘Debt and Older People’, a report by the Personal Finance Research Centre at Bristol University, commissioned by Help the Aged and Barclays.

 

As they prepare for retirement, people should be able to sit back and enjoy the fruits of their years of hard work, rather than struggling to manage their debts. It’s extremely worrying to see some people carrying debts with them into retirement – with some still paying off mortgages in their 80s, as the report reveals.

 

So many were disappointed by the scale of the government’s measures to help older people stay warm this winter. As the Help the Aged website reports, a poll carried out by ComRes reveals that:

 

·        Eight out of ten MPs think increased investment is needed in the Government’s fuel poverty programmes, including Warm Front.

·        Two in three MPs believe the winter fuel payment should be increased.  

·        Three in five MPs believe the extra tax revenue from rising energy prices should go to fuel poverty programmes.  

 

It seems the recent increases in the cost of gas have simply pushed many older people’s budgets too far. Winter heating bills can take up a significant proportion of any monthly budget, but older people with fixed incomes – and no real potential of earning more – have been hit particularly hard.

 

It all underlines the importance of clearing debts before retirement. Once someone has retired, their income isn’t the only thing that shrinks. Their options for managing debt often shrink too, along with the amount of ‘spare’ money they have once they’ve accounted for all their unavoidable expenses.

 

This doesn’t mean that debt solutions such as debt management and debt consolidation loans aren’t an option for older people, but – in general – the younger someone is, the easier it’ll be to manage their debts. After all, creditors are more likely to agree to a debt management plan involving reduced payments (rather than pushing for bankruptcy, for example) if they can see that the borrower can commit to making those reduced payments regularly until the debts are paid off.

 

But as long as the borrower acts in time, debt management can be a particularly effective way to pay off debts in time for retirement. A professional debt management organisation can help over-stretched borrowers do the maths – calculate how much they can really afford per month, and determine whether a debt management plan could help them clear their debts before they retire.

Read more about debt management, debt consolidation, IVAs and Trust Deeds at www.thinkmoney.com.

Useful Debt Consolidation Links

Debt Counseling Service is one of the most prominent non-profit debt help bodies that have helped more than 200000 consumers raise their credit scores and make good use of their credit available. It is hard enough being in debt without having to worry about choosing the right debt help product. You do not need a finance degree to understand the different options. Here is a quick guide. Debt counseling agencies help you negotiate a payment schedule with your creditors. This can lower your monthly payments by spreading them out over a longer period. You usually have to pay a one-off enrollment fee to the agency, plus a monthly fee. This may be a good option if you do not qualify for a debt consolidation loan.

Are debt consolidation loans still available? Every three months, the Bank of England publishes its Credit Conditions Survey, which reveals what changes lenders have seen in the credit market recently, and what they expect in the months ahead.

The most recent Survey confirms what you’d probably expect – that secured and unsecured credit did indeed become less available in April-June 2008. But the news isn’t all bad. Lenders may be more cautious about giving people loans, but they’re still lending significant amounts of money for all kinds of purposes, including debt consolidation.

What’s the point of debt consolidation anyway?
For many people in debt, debt consolidation can be an effective way of reducing their monthly outgoings. In general, the longer the time period over which they repay their consolidation loan, the smaller each monthly payment will be. Of course, this does mean that they’ll be in debt for longer, and that they’ll end up paying interest for longer, which can also increase the overall amount they repay.

However, a debt consolidation loan can also save borrowers money. First of all, consolidation loans tend to come with lower interest rates than debts such as credit cards and store cards, and this means the interest will build up more slowly. Second, when a borrower consolidates their debts, they’re making their finances much easier to handle – not just because they’ve reduced their monthly payments, but because they’ve brought all their debts together into a single payment. Obviously, remembering one payment is far easier than remembering multiple payments, so debt consolidation can reduce the risk of being charged for late / non-payment (something which also looks bad on a credit rating).

What other debt solutions are available?
Some people may find they can’t get a consolidation loan – or decide they want a different way of regaining control of their finances. The important thing is to talk to a debt specialist who offers a wide range of debt solutions, from debt management plans and debt consolidation mortgages to IVAs (Individual Voluntary Arrangements) and Trust Deeds (for residents of Scotland).

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Considering a debt consolidation remortgage

If you have several debts you are looking to repay, a debt consolidation remortgage could be the answer. It allows you to consolidate your debts as part of your mortgage terms – effectively adding your debts to your mortgage. It also enables you to repay the debts over a much longer period than an unsecured debt consolidation loan, or other debt solution, making repayments cheaper (although repaying what you owe over longer could mean you pay more in total.)

Will I be able to get a debt consolidation remortgage?
It’s been well publicised over the past year that mortgages are harder to get than they used to be – a 10% deposit is all but a necessity, and lenders are being stricter about their lending criteria than in recent years.

Because they involve paying back both your mortgages and your debts, debt consolidation remortgages can be a little harder to obtain than regular mortgages. But with a sufficient credit rating, adequate deposit and a proven ability to repay it (i.e. good earnings), it’s still quite possible to get a competitive deal.

As debt consolidation remortgages rely on equity withdrawal, the amount of equity you have tied up in your home will also affect your ability to obtain a debt consolidation remortgage, and how much more you can borrow to pay off the debt.

Your equity includes any deposit paid on the house, any repayments you have made and any increase in your home’s value – essentially, it is the proportion of your home that you actually own. The more equity you have, the more equity you have the potential to withdraw – plus your lender will be more confident in your ability to repay.

Will it be affordable?
This really depends how big your debts are – i.e. how much extra you need to borrow. For example, if you have a mortgage for £100,000 and want to consolidate £50,000 of debts, you can expect your payments to go up by 50%. Consolidating £8,000 of debts on a £150,000 mortgage, on the other hand, would be much more affordable. If you are unsure whether your debts are too big for a debt consolidation mortgage, or want to know about other possible debt solutions, talk to an expert debt adviser.

Interest rates
Debt consolidation remortgages are offered at the same rate of interest as a regular mortgage – the only added expense will be the extra you borrow to pay off the debts you have consolidated into the mortgage.

This will vary depending on your circumstances: if the homeowner has a poor credit history, the interest rate is likely to be a little higher. Since the interest rate applies to the whole mortgage, not just the other debts, this could add up – so it is important to make sure you can afford the monthly repayments if you are going to take this route.

Article written by M Taylor of debtadvisersdirect.co.uk