Archive for June, 2010

Research from R3, the insolvency trade body, reveals that a far higher proportion of younger respondents are more likely to leave their bills unopened and avoid their creditors than older respondents.

Among those struggling with debt, over a third (36%) of the 18-24 year olds surveyed have not contacted anyone for help as it is ‘easier not to think about it’ compared to just 9% of 55-64 year olds.

In addition 26% of the 18-24 year olds surveyed say they do not open their bills because they cannot face them, whereas this figure drops down to 10% for 65s and over. Similarly 28% of 18-24 years olds surveyed are trying to avoid contact with people they owe money to, whereas this applies to only 11% of 65 year olds and over.

R3′s President Steven Law commented:

“Despite a global recession and near financial meltdown, younger generations are still operating on the basis that high levels of debt are normal and the consequences of this have created a clear generational split. It is extremely troubling that irresponsible attitudes towards debt are entrenched by the age of eighteen as this is likely to lead to a lifetime of financial problems.”

The report also finds:

- Just under a third (30%) of 18-24 year olds cite they ‘don’t know where to go’ as the reason for not contacting anyone for help, compared to 8% of 65 year olds and over.

- Moreover, across all age groups, 44% of those struggling with debts mistakenly believe that debt advice must be paid for.

Steven Law added:

“If nearly half of those struggling with debts believe incorrectly you need to pay for debt advice, we have little chance of resolving this problem. Most insolvency practitioners, for instance, are prepared to provide their time free for a first meeting with a debtor.

"Similarly, the Citizens Advice Bureau will provide free advice.

“In addition, financial advice needs to get away from promoting ‘debt as a way of life’ that some irresponsible lenders use and instead focus on making debt more proportionate to an individual’s financial makeup and so avoid long term financial problems."

Owning a credit card doesn’t have to be synonymous with debt problems. While some people do have a negative view of credit card spending, there’s no doubt that having a credit card, if done correctly, is the cheapest way of borrowing money – far more so than taking out a personal loan on the high street.

If you approach applying for a credit card in the right way then owning one can dramatically increase your purchasing power. This should not be confused with being able to supplement your income with credit, especially buying everyday items such as groceries and petrol, and instead should be used for pre-planned, larger purchases.

Perhaps you want to meet the deadline on an early bird season ticket offer for your football team, or maybe your car has packed up and you need to buy a new one sooner rather than later. This is where a credit card comes in handy – if you do a bit of research beforehand, you can secure a deal that offers zero per cent on purchases and balance transfers for up to a year, meaning that borrowing money won’t cost you a penny.

If you want a credit card but aren’t sure whether one is right for you, it’s worth considering whether you have a big purchase on the horizon that you may not be able to afford otherwise. Don’t fall in to the trap of having increased purchasing power for the sake of it – if you start buying things you don’t really need, you’re likely to run into financial difficulties further down the line. If you make late payments or miss payments completely, for example, then you’re likely to face a penalty charge in addition to doing nothing to improve your credit score.

This is essentially ‘bad’ debt, but is debt necessarily a bad thing on the whole? Well, no – many of us wouldn’t be where we are without it. The overwhelming majority of students wouldn’t be able to afford to go to university without taking out a student loan, while entrepreneurs harbouring ambitions of becoming the next Alan Sugar or Richard Branson wouldn’t be able to do so without utilising a business loan.

Most of us are afforded serious financial clout when we purchase our first home, something that generally isn’t possible without taking out a mortgage. Debts such as these are a means to an end – while they’re not free, you can look forward to reaping the financial rewards further down the line, so long as you secure or remain in a steady job.

Before taking out a credit card, it’s important to draw up a budget and a repayment plan. The golden rule is only borrow what you need – borrow more and you’ll only have to pay it back later, which means you could be saddled with unnecessary, sometimes expensive, debt. But borrowing a relatively small amount means very little unless you pay it back quickly, as this is a sure fire way of avoiding paying any unnecessary interest.

If you are experiencing debt problems, don’t be tempted to borrow your way out of debt by taking out another credit card. If you’re having trouble affording life’s essentials, seek advice from elsewhere – there’s no need to rely on a credit card. If your household’s income is less than £66,000, for example, then you may be entitled to some form of benefit, and an online check only takes a matter of minutes.

Fortunately, it’s become easier to keep tabs on spending thanks to the advent of the Internet and online banking. With just a few clicks of the mouse, you can check your credit card balance, set up a repayment plan or apply to have your credit limit increased. And with the overwhelming majority of online retailers accepting credit cards as a form of payment, you’ll have a world of products and services at your fingertips, all from the comfort of your own home.

While the Internet has proved a fantastic resource for consumers, its popularity has unfortunately attracted a band of financial criminals. Among their most widely used tricks is the phishing email, which arrives in your inbox pretending to be from your bank and asking you to ‘verify’ your bank code and password, sometimes even your pin number.

A staggering 59 million of these are sent every single day, and worryingly, one in six of them are opened. It’s easy to see why – the majority look pretty professional, and for the unsuspecting there’s no reason to assume that anything is unusual. Even if you think the email may be genuine, it’s always worth telephoning your bank or visiting its website to make sure. No financial services websites will ask you to confirm your details in an email, so never feel as though you have to.

It’s likely that you’ve received a number of phishing emails already, and more often than not, they’ll look as though they’re coming from banks that aren’t yours. Scammers rely on matching these emails with an account holder’s actual bank, and if the person isn’t familiar with phishing, then they may well get caught out. If you receive a phishing email, never, ever click on the link at the bottom of the message or confirm any details. If the option is there, report it to your email services provider.

While the pros of online banking and spending far outweigh the cons, it is worth considering just how easy it is to spend money on the Internet. Use your credit card responsibly and think of it as fire – while it’s an incredibly useful tool, it may burn you if you get carried away. Be disciplined and only borrow and spend as much as you need. If you repay your debts sooner rather than later and stick to a budget, then you can look forward to paying less interest and ultimately more money, which will give you more financial room for the important things in life.

Source: independent.co.uk

Brace yourself for a volatile financial future. If research due to be released on Monday by R3, the association of insolvency professionals, is correct then we could all be in for a white-knuckle ride as more people start to struggle with debt and go bankrupt. And those affected by this are not just the debtors, but the whole of society. Debt can travel through communities like a virus – hitting families who try to bail out their weaker members, destroying relationships, emptying the coffers of businesses affected by bad debts and even lowering the salaries that companies can afford to give their employees.

At first glance, R3′s briefing paper, Barriers to Seeking Advice – pre-released exclusively to The Independent – may seem to tell us what many of us already know. It reveals "a clear generational split on attitudes to debt", with younger people far more likely not to open bills and to avoid contact with creditors.

R3′s research is based on almost 2,000 people who have debt problems but who have not yet sought help with them. Over a third of 18- to 24-year-olds (36 per cent) and 29 per cent of 25- to 34-year-olds had not looked for help as they felt it was "easier not to think about it". But the figure was much lower for 35-to 44-year-olds (19 per cent) and lower still for older people.

While these results may not be surprising, the implications are still worrying. "It’s inevitable that the young are more lax about debt," says Richard Murphy, director of Tax Research UK. "They have got to be to survive. Debt has been institutionalised for them. This is a deliberate ploy by the financial services industry in combination with Government. We should be very worried about it. The problem is not the young people but the capture of the whole idea that debt is good."

In spite of the worldwide financial crisis which was partly triggered by excessive debt, and the prospect of several years of austerity in order to pay down government borrowing, there are many signs that, on the whole, we are not going to change our ways. "I don’t know how much we have learnt," says the insolvency practitioner Bev Budsworth, managing director of the Manchester-based company The Debt Advisor.

"Credit institutions are really keen to catch young people. Young people are really coerced into taking out store cards. And store cards are the tipping point for young people. They all have good intentions of clearing the balance but it is very easy to make just the minimum payments. Before you know it, you have accumulated £1,000 in debt," she says.

Going from this level of debt to something unmanageable can be worryingly easy. "It doesn’t take much to knock people off course," says R3 president Steven Law, a partner at the Ipswich office of the accountancy firm Ensors. "Debt spirals out of control so quickly when people aren’t making payments to cover the monthly interest."

The RSM Tenon Tracker of personal insolvency in England and Wales shows "the fastest-growing age groups being the over-65s and the under-25s", says RSM Tenon’s head of bankruptcy, Mark Sands. Under-25s accounted for nearly 5 per cent of all personal insolvencies in the first three months of 2010. Nearly 2,000 people in this age group went in for bankruptcy or another official form of insolvency, up 27 per cent on the year before.

Since people tend to build up debts over a period of several years, these figures would suggest that many of those getting into trouble are as young as 17 or 18 years old. This could be because the cost of going to university can now mean accruing debts of more than £20,000 for people who do not have families to support them. But the role of the banks and other lenders is also raising questions.

For instance, the Government has promised "a new framework that promotes responsible and sustainable banking, where regulators have greater powers to curb unsustainable lending practices". If banks had not lent too freely, there would be no need for such an initiative. The figures from R3, however, suggest that around 2 million adults are in significant financial difficulty – and that would include 100,000 under-25s if the RSM statistics are representative.

A Citizens Advice caseworker, who prefers to remain anonymous, thinks that banks cultivate the young. "Faced with an old person in their forties or a young person in their late teens or early twenties, a bank will always go for the younger person. The bank will offer the younger person more in terms of an overdraft," he says. Young people are more attractive to lenders, he adds, as their longer life expectancy gives them more opportunity to build up debt and to earn. And if they really go off the rails early on, the parents can often be counted on to help pay back the debts.

Banks have also played a major role in something that should be extremely positive, the growth of personal finance education over the last decade. Barclays’ Money Skills packages and NatWest’s MoneySense for Schools will be well-known to many teenagers. NatWest is very proud of its scheme, saying, for instance: "If you think you might be running into financial difficulty, then MoneySense can help." Mr Murphy takes a different view. "They are teaching people to accept debt. What an absurd scenario that is."

The need for more money education is one of the main themes being promoted by R3. But money education has never been more widely available than in the last six years. In that same period, personal debt has risen nearly 50 per cent across the UK to a total of £1,460bn, according to charity Credit Action, which adds: "Individuals owe more than what the whole country produces in a year."

In the future, as a nation we will be dependent on generations of graduates who will start off their careers with a mountain of debt which, in many cases, will be far more than they earn in a year. We will have to hope that they do keep on paying their debts and do not get downhearted in large numbers.

Maggie Kirkpatrick of the Consumer Credit Counselling Service is not optimistic about the ability of this generation to pay back their debts. "Students leaving university now are finding it harder to get higher-paid employment," she says. She detects amongst them "sheer disappointment at not being able to achieve what they expected". And she hopes that they do not get so disillusioned that they just give up on the debt repayments, but she says: "That might be something that grows in future."

Indeed, young people do have an incentive that older people do not have to give up on repayments. "There is no fear of bankruptcy because they have nothing to lose," says Sands. Few own their own homes; their cars (if they have them) usually cost them very little; they are unlikely to lose their jobs as they are mainly trainees; and they can still work their way round the world if they want.

But if students do keep on course with repaying their debts, Murphy is concerned at the other sacrifices they have to make. "This debt restricts their freedom of choice. They may feel they have got to take the highest-paying jobs," he says.

By the end of June there will be more information available from R3 about the price to society of personal debt. Its geographical analysis of insolvency is expected to show a much higher incidence of bankruptcy in coastal areas than in inner cities. Insolvency appears more likely to happen in zones of low incomes and high unemployment; and, in turn, a higher insolvency rate will slow down the economic growth of an area.

Steven Law of R3 says: "When more people are not spending, it can hardly help a consumer-led recovery." In other words, our own prosperity is tied in with that of our neighbours. And if young people are likely to default on their debts more often in future, that is an issue that concerns us all.

Case study

‘£20,000 of debt is like a big cloud over your head’

Music graduate Jane (not her real name) would like to do a masters degree. But she says: "It would be impossible." The reason that she cannot go back into study is that she is still carrying £20,000 of debt. Now 25, and working as a teacher of English as a foreign language, she is hoping to pay off her bank and student loans by the age of 30. "Having £20,000 of debt is like having a big cloud over your head."

At the end of each month the graduate usually has several days where she cannot afford to buy anything or go out. If she goes abroad she will earn more.

So Jane is hoping to land a job in Japan, where the salaries are relatively high. Once she clears the loans, she will be able to live her life more naturally and in tune with her true ambitions. "I don’t think about the debts much," she says. "What I think about more are the opportunities I don’t have. That gets me down." Among her friends at university, some were financially secure as they came from families which could give them some support. Some, such as Jane’s, could not afford anything.

She does not agree with any suggestion that young people are particularly irresponsible in either running up debts or repaying them. She says: "If it is completely your responsibility and you see a quarter of your income eaten away each month then you can’t be flippant about your debts."

Source: independent.co.uk

A credit charity has spoken out to warn the recently turned self-employed to be vigilant over their finances or risk incurring further debt as a result.

The Consumer Credit Counseling Service (CCCS) has warned those who have turned self-employed during the recession of the dangers of supporting their businesses with personal borrowing, as recent statistics show 1.2 million more people became self-employed during the economic downturn.

The mix of high unemployment, redundancies and lack of job opportunities has meant increasing numbers of people looking at other avenues to make a living, with many choosing to do so as self employed.

The survey includes anecdotal evidence suggesting many began working for themselves due to redundancy and job shortages, and that these same people are more likely to suffer debt problems, and are “struggling to make ends meet”.

Geoff Waugh, manager of CCCS’s counseling centre for the self employed, said: “CCCS regularly sees self employed people with debt problems who mix their business and personal finances.

“Many will often take out loans and credit cards to support their businesses during tough times, which can make their situation worse. Others will use the same bank account for both business transactions and day to day spending.

“Keeping your finances separate is essential, as it gives a greater degree of protection.”

Source: debtmanagementtoday.co.uk

Research from Britain’s number one comparison site moneysupermarket.com* has found that 63 per cent of balance transfer card users have also used their card to make a purchase. Almost a third of these (29 per cent) users admitted to having never intended to make a purchase on the card in the first place.

Making a purchase of just £50 on a card with an existing balance transfer of £2,500 could cost up to £106 in interest over 12 months, due to the higher APR rate for purchase transactions. Due to the repayment methodology on the majority of credit cards, anyone making this mistake would have to pay off the entire balance transfer balance before they could repay the purchase balance. This is due to a repayment rules, due to be outlawed, known as ‘negative payment hierarchy’ whereby the balance with the lowest interest rates are pay off first.

MBNA today announced it is moving to a positive payment hierarchy as of September 1st this year, four months ahead of the Government requirement. This means anyone with an MBNA card will see their repayments go towards their most expensive debts first.

Kevin Mountford, head of banking at moneysupermarket.com, said; “Despite this issue receiving a lot of publicity over the last few years, it is still worrying that many credit cardholders still make the crucial error on their cards of using them for both balance transfers and purchases. Although many cards advertise zero per cent rates for balance transfers and purchases, the majority of cards only offer short term deals for purchases. Once this deal ends, the outstanding balance is protected and will accrue interest at a much higher APR, typically over 18 per cent.

“The easiest way to avoid this mistake is two use two different cards, one for balance transfers and one for purchases, however in a market where credit is difficult to come by, this is easier said than done. Alternatively you could take out a credit card which offers equal promotional deals on balance transfers and purchases, such as the Virgin Credit Card 12/12 or go for a card such as the Nationwide Credit Card, which operates a positive payment hierarchy whereby the most expensive debt is paid off first. As of September 1st, MBNA cards, which represent a sizeable chunk of the market, will also pay off more expensive debts first.

“If you have made this crucial mistake of using your card for both, then you need to look to balance transfer away to a new card or aim to pay down your balance as quickly as possible.”

* Opinium Research carried out an online poll of 1,933 British adults from 27th April to 3rd May

2010. Results have been weighted to nationally representative criteria.

Source: creditman.co.uk

First quarter statistics show a steady rise in hits to the new consumer section of the Credit Services Association (CSA) website as debtors look to learn more about managing their finances.

In the first three months of 2010 there were 1,754 visits to the new consumer section of the CSA website: 500 in January; 613 in February; and 641 in March.

Although total numbers remain comparatively low, especially compared to bodies such as Citizens Advice or the CCCS, the upward trend is still noticeable according to CSA Chief Executive, Peter Wallwork: “Although a trade organisation we continue to work hard in making our industry more accessible to consumers,” he says. “And it seems to be working.

“We exist to help our Members, but recognise that in being more open to consumers, and indeed the media, we may dispel some of the myths that have been allowed to fester for too long, and improve communications.”

In terms of the specific areas of the site visited, the new advice page proved to be the most popular, as were the detailed fact sheets that were launched last year to provide greater transparency of the industry.

The CSA’s Code of Practice – which clearly details the culture and environment in which debt collection agencies are expected to behave – was downloaded 99 times, and the complaints form requested on 22 occasions (ie 1.25% of the total visits). Nearly all of the complaints related to the issue of ‘mis-trace’.

“We hope that in furthering their knowledge of how we work, we can help them in managing their debts more effectively,” says Peter. “We also hope that it will reduce the number of complaints we receive in circumstances where complaints could have been avoided.”

The number of visitors to the CSA website (www.csa-uk.com) – including businesses – also increased month-on-month in the first quarter. Of the 10,842 hits, there were 3,495 in January, 3,636 in February and 3,711 in March.

Source: creditman.co.uk

As a recent report from the debt charity Citizens Advice Bureau shows that staff fielded an additional 2.4 million debt enquiries last year, there are now worries that potential spending cuts could hit the debt charity sector hard.

Many of the CAB centers have said that they are concerned that local councils will slash their funding, as public spending is cut in an attempt to reduce the budget deficit.

David Harker, chief executive of the CAB, has said: “We were able to help more people last year thanks to some generous additional funding from the government and many local councils.

“However much of this was short term, and our network of community based services, which rely on the generous help of 21,000 volunteers, may not be able to help as many people in future if funding is cut.”

Debt advice was the biggest topic of advice for CAB callers in 2009, making up 34% of all enquiries.

Enquiries about private bailiffs soared from 13,845 in 2008 to 19,090 in 2009. Meanwhile, enquiries about mortgage and secured loan arrears shot up by 21%. 

As the public sector comes under pressure from looming cuts, the private debt advice sector is gearing itself up to help bear the burden.

According to one debt expert, a recent government enquiry highlighted that the private sector already provides an estimated two thirds of debt solutions in the UK.

Kevin Still, debt expert and director of Atlantic Financial Management, warned that middle class Britons suffering debt problems may be overlooked as charities could be forced to focus on the most vulnerable cases. He said: “The new coalition government will probably focus their attention on the most vulnerable, and cases of severe financial hardship. This will probably mean that professional debt solution providers in the commercial sector will take up the slack as more middle class, homeowners and self-employed fall into serious debt problems as the wake of the recession and further cost cutting measures take effect.”

He continued: “At Atlantic Financial Management we have set out to establish a lost cost service that enables people with debt problems to obtain immediate debt relief and speak to a trained debt advisor exactly when they want to. It can take months to take the decision to deal with your household debts, but when you do you want to speak to somebody straightaway and feel that they are there for you when you need them.

“The CAB does a great job, but by their own admission they are under-funded and reliant on volunteers, with high turnover, and each advisor needing a high level of training to become a proficient specialist. With over a third of the enquiries on debt, this places a huge pressure on each CAB. We aim to be able to offer all-round debt advice and a full range of debt solutions, including Debt Management Plans (DMPs) and Individual Voluntary Arrangements (IVAs). We have an excellent record of getting interest and charges frozen and for our Insolvency Practitioners to get IVA proposals accepted at creditors meetings.”

Source: debtmanagementtoday.co.uk