Archive for March, 2010

A shake-up of the credit card market – with the aim of giving borrowers a better deal – has been announced by the Government. Financial Mail assesses the impact of the changes:

What is the Government up to?

It has become increasingly irritated over some of the sneaky tactics used by credit card issuers to make profits at the expense of indebted customers.

Many companies have been culpable in fueling the personal debt boom by allowing already over-indebted people to borrow even more. Last year it launched a review into the credit cards market and promised regulation to stamp out some of the most anti-consumer practices. Last week’s measures were the fruits of this investigation.

Will cards be cheaper?

No – indeed they might become even more expensive. But the terms should become more transparent, with issuers agreeing to stop some of the underhand ways in which they previously extracted profits from customers, often without cardholders knowing.

What are the changes?

The main one is all card issuers – of store cards as well as credit cards –agreeing to apply customers’ payments to their most expensive outstanding debt.

At present, most providers apply repayments to the cheapest debt first, which means the more expensive debt racks up ever higher interest charges, with customers in effect paying interest on interest.

Dual pricing has been a big feature of the cards market, with some issuers offering zero per cent deals to borrowers transferring debt from another card provider.

But if a borrower then uses the card to spend, that new spending attracts interest at rates in the high teens and remains as uncleared debt until the transferred balance has been paid off, racking up charges on the way.

Any other changes?

To encourage people to clear debt, the minimum monthly repayment required for new customers will cover at least any interest charges plus one per cent of the outstanding debt.

Existing customers who persistently make only the minimum repayment will be reminded of the expense of adopting such a repayment strategy.

Card issuers will also stop granting unsolicited credit limit increases to people already in acute difficulties while borrowers will be able to turn down any increase to their credit limit.

Card issuers will have to give borrowers 60 days notice of any intention to increase their interest charges – double the current notice period.

And if a customer is unhappy with the rate rise, they will be able to reject it and instead close their account and pay off the balance at the existing rate.

Finally, cardholders will be given an annual statement detailing the interest they have paid and the rates incurred. The idea is to encourage people to take greater control of their debts and perhaps encourage them to shop around.

Will these changes become law?

No. The Government has struck a deal with the credit card industry for the new measures to be introduced voluntarily – by the end of the year at the latest. Legislation may then follow, although the outcome of a General Election might change things.

Are card issuers pleased?

Most have kept quiet, not surprising given that the measures will cost them about £500 million over the next two years. Only Saga and Nationwide, which already apply repayments to the most expensive debt, have commented.

On the application of repayments to the most expensive debt, Chris Rhodes, product and marketing director at Nationwide, says: ‘This is excellent news for anyone who cannot or chooses not to pay off credit card debt in full.’ Ali Crossley of Saga Personal Finance says: ‘The introduction of these consumer rights will undoubtedly help millions of people.’

What do the experts think?

ON the whole they are positive. Peter Vicary-Smith, chief executive of consumer group Which?, says moves to enable credit card users to pay off their most expensive debt first are a ’step in the right direction’. David Black, banking specialist at financial research company Defaqto, says the measures ‘are good news for hard-pressed consumers’.

How about the public?

Janet Clark, 56, a part-time dressmaker from Colsterworth, Lincolnshire, believes it is about time all card issuers allowed customers to pay off their most expensive debt first.

Janet, whose husband Gordon, 64, is a fork-lift truck driver, has a Nationwide credit card. She doesn’t always clear her card debt but is comforted by the fact her repayments will always apply to the most expensive part of her debt.

‘I took it for two reasons,’ she says. ‘First, it is one of the few to apply repayments to the most expensive debt. And second, it remains a good card to use on holidays because it charges no extra fees for use on the Continent.’

Will credit card rates come down from the high teens?

Afraid not. Indeed, the ultimate price cardholders will pay for these new measures is higher interest charges. Certainly, card issuers are going to want to recoup the £500 million as soon as possible and the easiest way to do that is by raising rates.

Already, despite a record low base rate of 0.5 per cent, card rates are at near ten-year highs. This has provoked John Thurso, Liberal Democrat business spokesman, to call for a maximum card rate to stop companies from profiteering. We might also see the end of the zero per cent card balance transfer deal.

Source: dailymail.co.uk

Britons owed a combined £52bn in personal loans to high street banks in February, according to new figures released this week.

The British Bankers’ Association (BBA) conducted a study which found that the total value of new loans issued during the month was £1.3bn.

This represented a rise of £100m on the figure for January, and on the average monthly value recorded for the six months prior to February.

“New personal loans increased slightly in February possibly as the car scrappage scheme was extended by a further month but gross lending was largely matched by higher repayments,” noted the BBA.

The new statistics also indicated that high street banks had £9.3bn in net overdraft lending outstanding last month, which was £0.2bn lower than the January figure.

Meanwhile, the Consumer Credit Counselling Service revealed recently that personal loans account for over a third of the total debt accrued by its customers.

The charity revealed that it now has over 100,000 debt management plans in place, with personal loans making up 39% of the overall £3.3bn in unsecured debt.

Source: compareandsave.com

Debt advisors have warned of a big rise in the number of local authorities in England and Wales using bailiffs to enforce unpaid council tax debts during the recession.

Council tax default cases have risen by a third in the last two years to three million, government figures have revealed.

The Citizens Advice Bureau (CAB) has reported a 30% rise in the number of people seeking help to deal with bailiffs chasing unpaid council tax in the last three years.

It said complaints of aggressive behaviour and overcharging by bailiffs were rising and has called for more support to be offered to those unable to pay.

Amanda Buchanan, one of those targeted by a bailiff, said when she had trouble paying her council tax bill she contacted her council, but her case was soon passed to a bailiff.

Amanda’s problems with debt started after a divorce. The bills started piling up and she owed £900 in council tax.

The knock on the door came when she was breastfeeding her daughter who was aged three months at the time.

“It’s one of the most personal things a mum and a baby can do,” she said.

“I was standing at my front door. I was in my home, my sanctuary. I’d asked him not to come in.

“He physically pushed his way into my home, walked in and sat on the sofa. I didn’t feel safe in my own home for months and months and months after that.”

‘Just wrong’

Amanda told the BBC she was charged £600 in fees by the bailiff for recovering the debt, but £400 was later returned after she got help from friend Mark O’Keeffe, who had previously worked as a bailiff. He told the BBC that debtors are often overcharged.

“They do prey on the fact that most people don’t know bailiff law, especially in terms of the overcharging of fees because most people won’t be aware of what the fees are,” Mr O’Keeffe said.

“I think it is outrageous,” he added. “For 95% of people who don’t pay their council tax it is usually not a wanton refusal to pay. It is because they are struggling financially.

“So to add on fees that total several hundred pounds to someone who is already struggling is just out and out wrong – criminal in some cases I would suggest.”

The Citizens Advice Bureau (CAB) has seen a rise in the numbers of people facing bailiffs for unpaid council tax debts. Advisors say they are concerned at the speed with which some councils refer defaulters to bailiff firms instead of finding alternative methods of payments.

The CAB’s Peter Tutton said: “The numbers of people who’ve come for advice about bailiffs collecting council tax has gone up by about 30% over the last two or three years.

“During the recession we’re seeing more and more people under financial pressure, and finding it harder to meet basic bills like council tax. So if there’s aggressive enforcement against them it could make their debt problems worse.”

Unclaimed benefit

Councils defend the use of bailiffs because they have a legal duty to collect unpaid council tax, and point out that there are ways of helping people who have problems paying the tax.

According to the Local Government Association (LGA), which represents councils in England and Wales, £1.8 billion in council tax benefit goes unclaimed.

“Councils certainly don’t enjoy using bailiffs and they would much prefer to help people pay their council tax in the first place,” said Corin Thomson from the LGA.

“But the worst thing people can do is put their head in the sand, and not talk to the council, because it is those cases that unfortunately sometimes end up with bailiffs.”

The bailiff industry says business has been busy during the recession, but chasing debts and therefore revenue has been harder because people have less ability to pay.

The industry itself is in favour of tighter control on bailiffs because it believes the law covering their activities is too complicated and should be simplified.

Steven Everson, director general of the Association of Civil Enforcement Agencies (ACEA), which represents larger bailiff firms, told the BBC that sometimes bailiffs do overcharge debtors, though he said the practice was not widespread.

“In any industry there will be individuals who don’t do things according to the book, and I accept that there may be instances where bailiffs charge more than is necessary but these instances are relatively few,” he said.

The government says bailiffs will be regulated, but probably not for at least two years.

source: bbc.co.uk

A record number of people contacted a debt charity last year but about 160,000 of them were so poor they could not be helped.

The Consumer Credit Counselling Service (CCCS) said about one in three people it dealt with had no immediate debt solution.

It claimed these people did not have enough income to enter into a repayment plan, nor did they qualify for any type of insolvency, including bankruptcy.

Its only advice was to tell them to find a way of increasing their income – by taking in a lodger, working longer hours or checking they were claiming all the benefits to which they were entitled.

The CCCS said its helpline received 335,323 calls during the year, 25 per cent more than in 2008. A further 150,000 people also sought help online, nearly two-thirds more than a year earlier and double the number for 2007.

But the charity said only a quarter of the people who came to it for help had the means to go on to a debt repayment plan or take out an Individual Voluntary Arrangement, under which regular repayments are made to creditors.

source: metro.co.uk

independent research commissioned by Callcredit Information Group has today revealed that young people aged 18 24 appear to be maximising available credit by taking out multiple current accounts with available overdraft facilities across multiple providers. Almost one in ten (9%) adults aged 18 24 years admits running three or more current accounts with overdraft facilities and 27% of 18 24 year olds who have more than one account admit to using more than three different current account providers.

The research also revealed that a significant number of GB adults nearly one in ten (9%) admitted to overinflating their income when applying for credit in a bid to secure a higher credit limit, with 6% of people acknowledging that they have applied for credit knowing they might not be able to meet the repayments.

While the end of the recession may be in sight, it seems that many consumers continue to struggle in managing their finances, said Graham Lund, Managing Director, Callcredit Information Group. Whats particularly concerning is the proportion of young people who appear to be targeting multiple providers for access to multiple overdraft facilities. Lending and borrowing responsibly to ensure affordability is vital for the recovery of the economy and lenders need to have a complete customer view not only of accounts held with them but externally too to ensure a consumer is not overburdened with credit.

The research also revealed one in four mortgage holders would default on their mortgage if their monthly income dropped by just 300, with this rising to three out of ten (32%) among the 44 54 year old age group.

Michael Middlemiss, Head of Credit Risk, Sainsburys Bank adds, This research reveals some alarming trends around how consumers view credit and how their behaviour has changed over the recession. Monitoring affordibility and being able to identify quickly and effectively any change in circumstances which may affect a consumers ability to repay is not a nice to have but rather key to being a responsible lender and essential good business practice.”

source: Creditman.biz

One in four people say they would struggle to keep up with their mortgage repayments if their income fell by just £300 a month, a survey showed.

Around 26% of homeowners said they would be in danger of defaulting on their mortgage if their monthly income fell by this level, according to credit reference agency Callcredit Information Group.

The research also found that 9% of people had deliberately inflated their income when applying for credit in a bid to qualify for a higher limit, while 6% had tried to take on more debt despite knowing they would struggle to meet repayments.

Around 35% of people pay off their credit card bills in full each month, with 5% of those questioned admitting they used to do this but now made only the minimum repayment or repaid a fixed amount each month.

The research found that people aged between 35 to 44, typically families with young children, were particularly likely to have applied for credit knowing they might not be able to repay it at 10%, while 13% had overstated their income when applying for credit and 7% had stopped repaying their credit card in full.

Graham Lund, managing director of Callcredit Information Group, said: “These statistics are extremely alarming.

“A significant proportion of people aged 35 to 44, many of who may have families to support, are living on a financial precipice where just one negative event, such as a reduction in paid overtime or an unexpected expense, could have disastrous financial consequences.

“What is of real concern is that some people are deliberately over-inflating their income when applying for credit in order to increase their credit limit.

“If the borrower is inflating their income significantly and then maxes out their high credit limit, they are running a serious risk of getting into financial difficulties and being unable to repay the debt.”

YouGov questioned 2,129 people between February 26 and March 1.

Source: The Press Association

Figures released today by R3, the insolvency trade body, indicate that almost a third (31%) of personal insolvencies that occur in March have been triggered by overspending during the festive season.

R3 members predict that there will be over 150,000 personal insolvencies in the UK in 2010.

These figures come as no surprise to R3 President, Peter Sargent, who commented:

Unfortunately, many people who were struggling financially at the end of last year allowed their spending to spiral during the festive season, in order to give their families a normal Christmas. These people will now be suffering from the Christmas Crunch, having seen their debts snowball since the large credit card bills began to hit their mats in January. With Spring round the corner, many feel like it is time for a fresh start and want to regain control of their finances.

However, the stigma of insolvency means that many wait up to six months before admitting they have a problem – for many people in financial difficulty it is the biggest hurdle preventing them from seeking help. Sadly, the longer people take to get help, the fewer solutions are available to them.

source: creditman.co.uk

Banks are continuing to aggressively target customers who have fallen into debt, according to a report by a group of Scottish MPs.

The Scottish Affairs committee has called for an end to “undesirable practices” such as automated calls.

The report says banks have a special obligation to behave fairly, and to help customers during the recession.

But it said it was concerned that frontline staff were under pressure to sell potentially unsuitable products.

The committee recommended that banks should work with Citizens Advice Scotland to ensure that aggressive tactics are eliminated.

On the issue of pay, the committee expressed disappointment that banks considered it a “necessary evil” to reward certain bank executives with enormous bonuses when thousands of rank and file employees faced redundancy.

The chairman of the committee, Mohammed Sarwar MP, said: “Whilst the committee recognises efforts being made by the UK and Scottish governments to provide support for individuals and businesses who are struggling to cope, unacceptable practices used by banks must stop.”

‘Credit starved’

The committee warned that small and medium-sized enterprises were struggling to gain access to affordable finance and the committee claimed that viable businesses were being starved of credit.

It said the UK and Scottish governments should ensure businesses received the necessary support to weather the current crisis and it awaits the government’s assessment of how banks have met their lending commitments.

The Federation of Small Businesses in Scotland praised the committee for highlighting the importance of transparency in small business lending decisions.

Spokesman Colin Borland said: “It is through greater transparency and better communication that the trust between the big high street banks and their small business customers will be restored.

“Further, the committee highlights that there is still some distance between how high street banks say they are behaving and the real-life experiences of small businesses out there in the real economy.

“That is why we need to get a swift, accurate picture of what’s really happening – and why the FSB in Scotland continues to argue for the creation of a Financial Intermediary Service to get to the heart of the matter.”

source: BBC.co.uk

Credit card holders will be offered greater protection from spiralling debts, although the changes are watered down from original proposals.

Consumers will be given 60 days to reject changes in the interest rates charged on their existing debts.

They will also be able to opt out of any increases in their credit limit.

The agreement comes after the credit card industry met the government’s original proposals with a strident 230-page defence of its methods.

There are 30 million UK credit card customers holding 58 million cards.

The industry said that 62% of all UK adults had at least one credit card, but borrowing on these cards had been in “gentle decline” since 2005.

Agreement

The government told the credit card industry that it had to “clean up its act”, but the group representing lenders came up with its own proposals for helping customers.

The new agreement is a merger of the two, with the changes coming into force by the end of January 2011 at the latest.

They include:

• Ensuring that the highest cost debt on a credit card is paid off first
• A new 30-day window to allow people to opt out of any unsolicited increase in their credit limit
• A ban on those in financial difficulties being offered an unsolicited rise in their credit limit
• A 60-day period for people to reject a change to the interest rate on their existing debt. If they reject it, they must pay off their account within that 60 days.
• Regular payments of only the minimum being met with more information from the lender.

“This is a fair framework of rights and rules that makes sure easy and convenient lending for the majority does not lead to unmanageable debt for the minority who may be in financial difficulty,” said Consumer Minister Kevin Brennan.

Melanie Johnson, who chairs the UK Cards Association, said: “We are pleased that our evidence on unsolicited credit limit increases and the re-pricing of existing debt has conclusively shown that existing practices do not need to be overhauled.

“We believe that, overall, the outcome of the review is balanced.”

The industry said that the changes would cost an estimated £533m over the first two years.

Cost of debt

The government backed down on initial proposals for a complete ban on unsolicited credit limit changes, and also accepted that on occasions debt should be re-priced depending on the risk level of the customer.

But it persuaded the industry to make the most significant change to existing practices – ensuring that the most expensive debt is paid off first.

This could cut the amount that borrowers will have to pay off and reduce the amount of time needed for some to clear their card debts. Very few lenders currently ensure that the most expensive debt on a card is paid off first.

Peter Vicary-Smith, chief executive of the consumers’ association Which?, said: “The government’s plans to enable credit card users to pay off their most expensive debt first are a move in the right direction, but there is still more to be done to ensure vulnerable consumers are protected.

“It is now time for industry to step up to the challenge and offer credit card users clearer and fairer terms and conditions, and weed out irresponsible lending practices.”

Some 61% of credit card holders pay off their bill in full every month.

source BBC.co.uk

Borrowers are struggling to repay much smaller amounts of debt than in previous years, according to one of the UK’s biggest debt counselling charities.

Although more than half – 98,705 – of the debtors seeking help from the Consumer Credit Counselling Service last year owed less than £20,000, the charity found a steep rise in the number of people who cannot afford to repay their debts or meet basic living costs — 55,063 in 2009 compared with 13,812 in 2008.

The research comes as the CCCS prepares to launch a new government-approved payment arrangement allowing struggling borrowers with at least two unsecured debts to make token payments of as little as £1 a month.

The CCCS says that in many cases people are struggling to cope with lower amounts of debt either because they have been made redundant, had their work hours or salaries reduced, or have had avenues of credit closed to them.

Malcolm Hurlston, chairman of the CCCS, said: “This can only be because of the recession, because the amount that people have borrowed has gone down relative to their income. I dread to think what will happen when interest rates go up.”

In previous years the trigger point for most people seeking help form the CCCS was owing more than 20 times their net monthly income. But in 2009, three out of every four CCCS clients owed less than 20 times their take home pay.

Elizabeth and David Allsopp are one of those included in the 2009 CCCS statistics: they are struggling to stay in their home after suffering the failure of their business and redundancy from subsequent jobs. The couple, in their sixties, borrowed more than £250,000 on credit cards and personal loans, and also remortgaged their home to support David’s micro-chip sales company and pay the wages of his four staff, but the business still failed four years ago.

The Allsopps found more work and managed to pay down their unsecured debt to about £50,000. But they both lost their jobs, Elizabeth in October 2008, and David in June last year, and are now unable to make further inroads into their debt. Their mortgage is in arrears and they face bankruptcy.

Elizabeth said: “You just don’t imagine ending up like this when you are in your sixties. At Christmas everyone gave us vouchers, while we couldn’t give anything. It’s the whole stigma of the thing. We’re very embarrassed by the whole situation.”

They could be helped by the new government debt plans, announced today. Borrowers who have been counselled by the CCCS and found to owe more than they need to spend on basic living costs will be offered a free channel to make token monthly payments of £1 a debt for up to six months. In return, they will have to agree to engage with their creditors and take responsibility for their debts.

In addition, new guidelines have been issued for lenders suggesting they should consider reducing or stopping interest and charges when a customer can prove that they are in financial difficulties. However, proposals to regulate debt management plans have been put on hold.

source: Guardian.co.uk