Debt Consolidation Advice, Help and News from Debt Advisers Direct

Online shopping: still going strong

Thu, 3 Jul 2008 16:14:25 GMT

As the credit crunch takes hold, people are beginning to wonder how far their money will stretch in the months to come. The High Street is just beginning to feel the strain: John Lewis recently reported a significant downturn in sales, with DSG (owners of Currys and PC World) announcing big yearly losses. So it may come as a surprise that online shopping is continuing to grow at an impressive rate.

According to a survey by Verdict Research, shopping online increased by 35% last year – going up to £14.7bn in total. If trends continue, they said, online retail sales will account for 13.8% of total consumer spending by 2012, reaching £44.9bn.

Growth in the face of a downturn
A spokesperson for Think Money said: “The news is surprising given the current market conditions. On the High Street we are seeing many people tightening their purse strings to make room for other costs of living, but it seems the same doesn’t apply to online shopping.

“It could be argued that it’s because shopping online tends to be a lot cheaper – not to mention that things like electronics are always going down in price – but it still stands that on average, people are spending a lot more.”

But the spokesperson was keen to warn of the risks of shopping online. “The prospect of handing over hard-earned cash can be enough to stop some people overspending on the High Street,” she said. “But it’s very easy for people to get carried away online, because there is no physical transaction being made.

“We deal with lots of people struggling with debt, and sometimes it can only take one or two impulse purchases before people find themselves in trouble.”

She continued: “If that happens, the most important thing is that it isn’t ignored. An expert debt adviser can look at your situation and find the best debt solution for you.

“For smaller debts, a debt management plan or debt consolidation loan might be the best way forward, or for bigger debts an IVA (Individual Voluntary Arrangement) could help.”

Inflation: how much have costs of living really gone up?

Thu, 26 Jun 2008 11:45:59 GMT

For those of us keeping a keen eye on our finances, the official 3% rate of inflation might seem a little low. It may be above the Government’s target inflation rate of 2%, but a 3% rise in average costs would still be affordable for the majority of British households.

In reality, the UK has recently experienced some sharp rises in costs of living that are less than manageable to many people – particularly those already stretched to their limits by debt.

It’s clear that the official inflation rate does not tell the whole story. This is why The Telegraph recently reported on what they call the ‘Real Cost of Living Index’ (RCLI): an unofficial measure designed to map out exactly how much more the average UK citizen pays out each year – and most importantly, the rise in essential costs that are unavoidable without significant lifestyle changes.

How is inflation calculated?
Inflation is the Government’s measure of how fast prices of goods and services in the UK are rising. They measure it by calculating the rise in price of a ‘basket’ of goods and services – a made-up basket that represents the buying habits of the average UK household.

Many companies use the rate of inflation to determine salary rises, and the Government will often use it to decide on rises in taxation and pensions – all of which are meant to keep the economy moving steadily.

However, many people disagree with the way inflation is measured, arguing that it does not accurately measure costs of living: it focuses more heavily on non-essential goods and services than on essential costs such as household bills, transport costs, etc.

Real cost of living?
The Real Cost of Living Index focuses on four key areas which affect household outgoings.

Transport costs – 27% average rise in the last 12 months
Food costs – 23% average rise in the last 12 months
Household bills (incl. Council tax) – 10% average rise in the last 12 months
Taxes – 1% rise in the last 12 months

Combining these numbers with the other measurements used to calculate the official rate of inflation, The Telegraph concluded that the Real Cost of Living rise is 9.5% – over three times the official inflation rate of 3%.

Managing your debts
“Costs of living are seemingly on a constant increase now,” says a spokesperson for Debt Advisers Direct, “so most of us are looking at ways of lowering our spending as much as we can. That might include walking more, eating out less, spending less on leisure activities, or maybe even selling our homes and downsizing.

“But lowering costs this way is especially difficult for the rising numbers of people in debt, who have to cope with the rising costs of living and their (often rising) debt repayments. When money is already tight, managing debts may be an even bigger concern.

“But there are a number of debt solutions designed to help people in different situations,” the spokesperson continues. “Both debt consolidation and debt management, for example, can lower monthly repayments as well as simplifying finances.

“It’s important to remember that lower monthly payments means paying for longer, possibly paying more in the long run. But at a time like this, the most important thing is often making sure you can afford your monthly outgoings.”

If you are struggling to repay your debts, it’s essential that you speak to an expert debt adviser. They will be able to speak with you impartially and advise on the best course of action to take. Debt Advisers Direct offer a range of debt solutions designed to meet different situations, including debt consolidation, debt management plans and IVAs (Individual Voluntary Arrangements).

Tax Freedom Day

Wed, 11 Jun 2008 10:21:55 GMT

You may have noticed your wallet feeling a little heavier lately. If you’re wondering why that is, it’s because you’ve just earned your first wages of the year.

Confused? So are most people.

June 2nd was ‘Tax Freedom Day’ of 2008 – the day of the year when the average worker has paid everything they owe in tax and is now earning for themselves.

Of course, this doesn’t literally mean you’ve paid all your taxes. It’s a theoretical date by which, if we were to pay all annual taxes up front, we would have paid them off. That’s just over five months of the year spent paying taxes – 40% of our total incomes, on average.

How is it calculated?
Calculating the date of Tax Freedom Day isn’t an exact science, because it takes into account a wide range of factors, many of which are hard to define. The Adam Smith Institute, the economic think tank who (among other things) calculate Tax Freedom Day in the UK, accept that the actual date could come a few days before or after the ‘official’ date.

The calculations do not just include the tax and National Insurance taken straight from your pay packet – they also count VAT, fuel tax, alcohol and cigarette duties, airline tax, car tax, and any other tax added on to the actual price of goods and services in the UK.

Of course, people pay different amounts of tax depending on how much they earn, and how many taxable goods and services they use. Tax Freedom Day is taken as an average of this, based on the total population and the amount spent on tax as a whole.

How accurate is Tax Freedom Day?
There are a few issues which make the exact date of Tax Freedom Day difficult to pin down.

Government borrowing
Not all Government spending comes from tax – much of it comes from borrowing from other countries. The UK Government have what is known as a ‘budget deficit’ – meaning the UK owes more money than it is owed – estimated to be around £43bn for the 2008/2009 financial year.

This debt ultimately needs to be paid back, and it will most likely be funded by higher taxes. Because this is essentially a ‘deferred tax’, the Adam Smith Institute do not include Government borrowing in their official figures for Tax Freedom Day – but they state that if they did, Tax Freedom Day would in fact fall on 14th June, almost two weeks later.

‘Stealth taxes’
The current Government have been accused by many of charging ‘stealth taxes’: taxes which are hard to spot or particularly hard to understand. Many believe the Government have deliberately introduced these to increase their tax income without angering the general public.

By nature, these stealth taxes are difficult to keep track of. However, the Adam Smith Institute detects them and includes them in their figures.

Other facts about Tax Freedom Day

Tax Freedom Day has been a lot later in previous years. In the early 80s, it came as late as June 20th – a whole 173 days’ worth of taxes, as opposed to 2008’s 155 days.
It’s also been much earlier – Tax Freedom Day 1965 was 27th April – just 117 days spent paying taxes.
The Adam Smith Institute states that if Government spending had grown in line with inflation since 1997, we could have abolished income tax, corporation tax, capital gains tax and inheritance tax, leaving the taxpayer £200 billion better off.

Debt consolidation mortgages - 3 questions to ask

Mon, 19 May 2008 11:32:35 GMT

Today, anyone looking into debt consolidation mortgages is facing a market that’s grown a lot tougher over the last eight months or so. With credit harder to find and more expensive – and the future of the housing market looking uncertain – they’ll need to ask themselves three questions:

Will anyone give me a debt consolidation mortgage?
Would that debt consolidation mortgage be affordable?
Is there enough equity in my house to make it worthwhile?

Will anyone give me a debt consolidation mortgage?
In recent months, the number of mortgages on offer has plummeted as lenders adopt a much more cautious approach to lending money. They’re not just turning down more applications, but requiring larger deposits from the people they do lend to.

This applies to remortgages (on property the borrower already owns) as well as mortgages (for purchasing a property in the first place). With mortgages, 10% deposits are common these days, and 25% deposits aren’t uncommon. As for remortgages, most lenders are now limiting them to 80% of the property’s value – down from 125% before the credit crunch.

Would that debt consolidation mortgage be affordable?
Many people have criticised lenders for not passing on recent cuts in the Bank of England’s base rate to their customers. At the end of April, over a third of British lenders did reduce the rates on their SVR (Standard Variable Rate) mortgages – but even so, the limited availability of credit is keeping interest rates higher than we’re used to.

Is there enough equity in my house to make it worthwhile?
If you want to consolidate your debts through a remortgage, you’ll probably need a bigger deposit than for a first-time buyer mortgage – it could be 40% of the mortgage deal, so you may be counting on the equity in your home.

When house prices were rising rapidly, this wasn’t such an issue: homeowners knew they’d have more equity to draw on if they just waited a while, so many of them saw debt consolidation mortgages as an ‘easy’ solution to debt. Now that the housing boom seems to be over, it’s a different picture:

Region	Change 1998 Q1 – 2008 Q1 (%)	Annual Change (%)	Quarterly Change (%)
East Anglia	196	3.4	1.4
East Midlands	183	2.9	2.2
Greater London	191	2	1.6
North	193	3.1	1.2
North West	176	1.3	-0.5
Northern Ireland	271	3.5	-1.5
Scotland	146	5.3	0.2
South East	169	3.3	0
South West	184	-3.3	-2.6
Wales	188	-5.3	-4.7
West Midlands	150	-3.7	-5
Yorkshire & the Humber	179	0.1	-0.5
All UK	176	1.1	-1

Source: Halifax House Price Index March 2008

This might give you some indication of price trends in your area – and perhaps how much equity you could have to draw on if you’re planning to remortgage to consolidate your debts. The key factors are:

how long you’ve had your property, and
whether you’ve already secured a loan / taken out a debt consolidation mortgage against it.

The Bank of England - swapping secure assets for `problem` debts

Tue, 29 Apr 2008 10:3:34 GMT

Today’s money markets have too many debts, too many problems – and not enough cash. No-one knows how much money banks and other lenders will recoup from the loans and mortgages they’ve given out, and this is restricting lending.

Why? Each bank is reluctant to lend any more money to anyone, either individuals or banks. They know it would be hard to replace their funds by borrowing from another bank, as they’d need to show they have enough assets to act as security for the loan. Even if a bank is owed billions of pounds in mortgage debts, there’s a problem: after what happened to mortgages in the US, no-one will accept these debts as collateral for a loan. So although those ‘problem’ debts are assets, they can’t be turned into cash.

Solution to a debt problem?
To stop the financial system from freezing under the weight of these debt problems, the Bank of England (BoE) has a plan to make it easier for banks to lend to consumers and to each other. The BoE is offering to temporarily swap banks’ mortgage debts (and credit card debts) for secure government bonds, which other financial institutions will be willing to accept as security.

A few important points:

Experts don’t expect this move to slash the cost of borrowing, but say it may stop the cost of borrowing from rising further.
Banks can only trade mortgage debts which were on their books at the end of 2007 – the BoE wants to help banks use their existing mortgage assets, not encourage them to grant risky mortgages, knowing they can swap them for bonds.
The BoE expects the banks to want about £50 billion of bonds to start with, but hasn’t fixed a maximum limit.

To protect itself, the BoE is only offering banks 70-90p of bonds for every £1 of these assets. Still, even 70p of secure assets is better than £1 of problem debts nobody wants.

Reasons for debt; solutions to debt

Tue, 22 Apr 2008 10:8:32 GMT

What’s the solution to debt? Whether you’re addressing an individual’s debt or looking for a solution to the UK’s personal debt problems, you need to start by understanding the reasons behind that debt.

In 2007, the Personal Finance Research Centre (PFRC) at the University of Bristol, supported by Standard Life, produced a report on why people borrow, and how to reduce or avoid that borrowing, at different points in their lives. It notes a significant shift in recent attitudes towards debt – and towards debt solutions.

Why do people borrow?
‘The essential function of borrowing is to smooth the ebbs and flows of income and expenditure throughout life. Previous research has distinguished borrowing to alleviate financial hardship and borrowing to augment a consumer lifestyle.’

‘Easy come, easy go: borrowing over the life-cycle’, a PFRC report

The report contains some very interesting findings. For example:

Young adults (18 to mid-20s) seem particularly likely to borrow to meet everyday expenses, and to make little distinction between ‘need’ and ‘want’.
To some young adults, the availability and benefits of debt solutions outweigh the drawbacks of over-borrowing.
Property is seen as the best investment, and worth borrowing for, as mortgages have been reasonably cheap recently and are also seen as a form of investment.
Ready availability and cheapness of borrowing makes it attractive – many credit users feel little desire or need to seek alternatives.

What do people see as the solution to debt?
There’s a big difference between manageable debt and unmanageable debt – the kind that calls for urgent action, whether that means making big lifestyle changes, seeking debt advice or looking into professional debt solutions.

So how do people know they’re sliding from one group into the other? How do they know they might need a debt solution? Interestingly, the report states that young adults tend to see external warning signs (e.g. final demands, threats of court action) as indications that they’re facing problem debt, while older people pay attention to internal warning signs (e.g. worrying about money, losing track of spending).

Some young adults, says the report, don’t really understand what debt solutions involve – and a ‘core minority’ see debt consolidation and insolvency as easy solutions to problem debt. It also shows that people (particularly those in or approaching the ‘family years’ (mid-20s to mid-50s)) tend to see housing equity as the solution to all their future financial needs.

What’s the long-term solution to the UK’s debt problems?
The report states that governments (and businesses, in some cases) can, for example:

Reinforce financial education. Standard Life is already involved in various initiatives – e.g. helping primary-school children understand how money works, and how it can work for them.
Use tax policy to encourage people to save for the future.
Counter some of the myths about money management – e.g. that housing equity is the solution to future pension needs.

Household spending: cutbacks in 2008

Fri, 11 Apr 2008 16:2:18 GMT

This year, almost three quarters of households are planning to cut back on their spending, says a survey by financial services provider Axa.

Increases in the cost of food, housing, petrol and utility bills (four important elements in a household`s spending) have left many people`s finances in a poor state, forcing most of the country to think about where they could cut back.

Then there`s the cost of debt. According to Unbiased.co.uk, the last year has seen a massive increase in personal lending, with personal loan levels rising from £2.6 billion to £9.8 billion. The average Briton now needs to devote around 1 day`s wages per week just to pay off the interest costs on their loan and credit card debts - before they put anything towards the actual debt! In other words, they have to get by on just 80% of their salary, which has to cover all their household expenses, as well as the payments towards their debts themselves.

Balancing the household budget
When people don`t have enough money for their debts and their living expenses, they need to balance their household budget by boosting their income, lowering their expenditure, or both.

11% of the people questioned in Axa`s survey said that someone in their household had taken on extra work to boost the household finances. But this isn`t always an option, and rising demands on the household budget can often lead to a vicious circle known as a debt spiral - people borrow more so they can keep up with their basic living expenses without ignoring their credit commitments. Credit cards provide a particularly tempting way for a household to `borrow against` next month`s budget, but borrowing like this is no long-term solution, as interest charges will make each month slightly more expensive than the last.

In many cases, the best way to stretch a household budget is to cut back on spending. No-one likes living without luxuries (whether that means holidays abroad, fashionable clothes or eating out), but sometimes it`s the only way to keep up with the essential expenses without getting further into debt.

Who’s cutting back?
But `belt-tightening` can benefit any household, not just the ones in financial trouble. Even people who can comfortably afford repayments to their debts could seriously improve their long-term finances by cutting back on their household spending and paying off as much of their debt as possible.

Say someone`s paying 18% interest on their credit card debt. If they can put aside just £5 per week to add to their minimum payments for the next 12 months, they’ll reduce their debt by £260 - and save themselves almost £50 in interest charges. In today`s economic climate, with experts predicting tough times ahead, that could make a big difference to next year`s household budget.

Charging orders: security matters

Fri, 4 Apr 2008 16:34:26 GMT

As a nation, we owe over £1.4 trillion. For some people, their share of that total is simply too much – and when borrowers worry about debt, so do lenders.

From unsecured debt...
Almost £230 billion of the UK’s personal debt is unsecured: there’s no property backing it up, so if borrowers don’t make their payments, lenders have to go to the courts for help.

It’s important to understand that courts aren’t there to punish people; they’re there to resolve disputes. If the court feels it’s the best way of helping the borrower repay a debt at a rate they can afford, it can issue a County Court Judgment (CCJ), laying down a new payment plan which they must follow. If this doesn’t work out, the lender can then ask the court to take enforcement actions. If the court thinks it’s necessary, it can issue a Warrant of Execution (and send the bailiffs to the borrower’s home), an Attachment of Earnings (and take money directly from the borrower’s salary), or a Charging Order (see below).

...to secured debt
A Charging Order is only an option if the borrower is a homeowner.

Basically, a Charging Order turns an unsecured debt into a secured debt by securing it against the borrower’s property. If the borrower doesn’t then keep up payments on the newly-secured debt, the lender has the option of asking the court to issue an Order for Sale (forcing a sale of the property), although this tends to be a last resort – they know they’ll receive the balance of the debt when the property is sold.

Between 2000 and 2006, the number of applications for Charging Orders grew from around 16,000 to almost 93,000. But there’s no guarantee the court will grant either a Charging Order or an Order for Sale. After all, the borrower entered into the debt on the grounds that it wouldn’t be secured against property, so the court would need to be convinced that a Charging Order is the best way to make sure the debt is repaid.

Staying out of court...
In most cases, there’s no need to end up with a Charging Order – or even to end up in court. When someone can’t keep up with their payments, there’s a wide range of debt solutions that could help them. They could reduce their monthly payments by consolidating their debts, or join a debt management plan and ask debt professionals to negotiate with their lenders on their behalf. People with larger debts could consider an IVA (Individual Voluntary Arrangement).

And most creditors would rather come to an agreement (see our Ten Golden Rules for talking to non-priority creditors) than take legal action – although they’re not likely to accept lower payments, waive charges or freeze interest unless they see the borrower doing their best to pay off their debts.

… and in the house
Even if a homeowner does end up in court, there’s no reason to assume they’ll lose their home:

If the court grants a CCJ against them, they’ll have the opportunity to pay off their debt at a rate they can afford.
If they don’t do that and the court grants a Charging Order, this gives them another opportunity to stick to a payment plan.
If they still don’t make regular payments, the court could issue an Order For Sale (but only if the lender requests it).
If that happens, that doesn’t necessarily mean they’ll lose their house – they may be able to get the Order For Sale suspended.

So although Charging Orders are becoming more commonplace, homeowners shouldn’t worry that they’ll lose their home as soon as they miss a payment on an unsecured debt.

The mortgage market slows down

Fri, 28 Mar 2008 13:23:29 GMT

When house prices were going nowhere but up, mortgages of 100% were quite common. Since the property was almost guaranteed to increase in value, banks and building societies felt confident about getting their money back.

Even people with no savings found they could get what they needed – and a bit more. 125% mortgages were very popular with those who wanted to improve a house as well as buy it.

Today, it’s a very different picture. The last lenders offering 125% mortgages have now pulled them from the market. Recent data from the Council of Mortgage Lenders (CML) shows that the typical first-time buyer in January borrowed 88% of their property’s value, down from 90% the month before.

Worried about lending
So why are the banks and other lenders cutting back on their offers? Remember that consumers aren’t the only ones worried about their finances these days.

When the economy is booming, financial companies are happy to lend money to businesses and individuals alike. They might not recover everything they lend out, but on the whole the interest they charge makes it all worthwhile.

But when things are looking grim, they worry that more and more borrowers may not be able to pay them back. They also worry about what might happen if their own creditors (including all the people who trust them with their savings) start asking for their money back. Plus, the libor rate (the rate at which banks lend to each other) is unusually high, at around 6%, so banks are reluctant to lend if it means they might have to borrow from each other.

Altogether, banks have good reasons to hang on to their money – and today, mortgage approvals are at their lowest level in about 10 years, dropping to 50,300 in January, 19% down from the previous month.

But the banks are still busy. January also saw 85,000 remortgages (43% up from December). After all, at the end of a decade-long house-price boom, millions of homeowners are already ‘sitting on’ many thousands of pounds of profit, and a remortgage can give them access to that cash.

Some of them remortgage to finance a project (home improvements, for example) while others do it to consolidate their debts – for someone with enough equity, a remortgage might be a lot more attractive than a debt solution like debt management or an IVA (Individual Voluntary Arrangement).

Worried about borrowing
For the moment, it’s mainly the supply side of the mortgage market that’s being affected: banks are simply less willing to grant mortgages. However, restricted access to credit can end up reducing demand for mortgages too.

House prices can suffer when too many first-time buyers can’t enter the housing market. With fewer potential buyers for each property, many sellers might feel pressured into dropping their price. The longer this goes on, the greater the risk we’ll enter a spiral of falling prices, with would-be buyers more and more convinced they’ll save money by waiting and lose money by buying.

If that happens, we might find that the banks are willing to lend – but no-one’s keen to borrow.

Where does the credit go?

Thu, 20 Mar 2008 15:58:17 GMT

From October to December 2007, UK residents spent £32.4 billion on credit cards, says APACS, the Association of Payment Clearing Services. Approaching £700 per adult, this was the second-highest total for any three-month period in history.

Of course, high spending around Christmas time isn’t necessarily something to worry about. It could just be a sign of a healthy economy, full of people with the cash to enjoy themselves in the festive season.

What’s worrying is this: this rising credit card usage wasn’t matched by a rise in retail spending around the end of the year – a ‘traditional’ cause of high credit card bills in December. If the money wasn’t spent on Christmas treats, then people were probably using their plastic more to pay for household expenses.

Using credit
Millions of people use their credit cards all the time. It’s a convenient way of paying for just about anything, just about anywhere, whether in person, online or over the phone. As long as they can pay off enough of the balance quickly enough to avoid interest charges and mounting debt, this kind of credit isn’t a problem, as it means people are choosing to use it.

The problems arise when people are forced to use their credit card to pay for basic living expenses like food. It could be one of the first steps on a slippery slope into unmanageable debt. Basically borrowing from next month’s budget, people are storing up problems for the future. Each month, their finances are stretched even further as they pay for last month’s ‘overspill’ – plus interest.

Shifting credit
Across the UK, millions of credit card users are avoiding interest by using 0% balance transfers as a kind of ‘do-it-yourself’ debt solution. According to a study by Sainsbury’s Finance, the first half of 2008 could see more than £6.6 billion transferred between credit cards. Switching cards seems particularly popular in the south west of England, where 15% of credit card customers are likely to switch.

When it’s done well, this can be a sensible way to avoid interest charges – but there are drawbacks.

First of all, most card providers charge a handling fee of around 2-3% for this, so consumers need to be careful with their calculations and make sure they’re not spending more than they save. A 3% handling fee means that shifting £4,000 would cost £120.

Second, this should never be seen as a solution to debt. If someone’s really struggling to make their monthly payments, they might need to consider a debt solution like a debt management plan or an IVA (Individual Voluntary Arrangement). And even if they’re not struggling, just making the minimum payments can mean it takes far longer than expected to pay off their debt. Although they won’t be paying interest if they can keep finding 0% deals, that does involve switching (and probably paying to do so) every 12 months or so.

Finally, the credit crunch is making it harder and harder for people to get access to credit, especially those with the most serious debt issues. This could really add to someone’s long-term debt problems – if they can’t find a new 0% deal (and they can’t pay off their balance), they might find their credit card debt starts growing at an alarming rate.

2008 – what’s on the cards?
We won’t know the figures for the first quarter of 2008 (January - March) until sometime in April, but the growing number of refused credit card applications isn’t the only reason to expect a decrease in credit card use.

Despite the increase at the end of 2007, overall credit card debt has actually dropped slightly, coming down from £55.6 billion to £54.9 billion in the last 12 months, according to independent financial adviser website Unbiased.co.uk.

And a recent Alliance & Leicester report found that fully 50% of respondents had recently spoken to friends about debt problems. It’s a good sign when people start talking about their debts. Listening to their friends can teach them a lot about the warning signs and pitfalls, and about the debt solutions (e.g. debt consolidation, debt management and IVAs) that might help them get their finances in order and break the cycle of over-reliance on high-interest credit.

Debt freedom day - an ‘interesting’ concept

Fri, 14 Mar 2008 15:27:56 GMT

From 1 January to 10 March 2008, the ‘average Briton’ didn’t really make any money for themselves. Believe it or not, they’ll need every penny they earned just to pay this year’s interest on their credit card and loan debts, without even touching the debts themselves.

That’s why independent financial adviser website Unbiased.co.uk named 10 March ‘Debt Freedom Day’, the day in 2008 when people had finally worked long enough to pay the cost of their debts.

20p in the pound
No-one, of course, put their first 70 days’ wages towards their interest payments. Even if the terms of the credit allowed it, people need their money for food, rent / mortgage, petrol…

So 10 March is really a symbolic date, but it’s an important symbol, reminding people just how much of their money is taken up by interest payments. It’s more realistic to see interest payments taking up around 1 day’s wages a week – or about 20p of every pound the average person earns throughout the year.

70 days – and climbing?
Last year’s Debt Freedom Day came on 1 February, ‘just’ 31 days into the year. Even then, the thought of working for a month (or 1 day in 12) to pay off interest was alarming, but this year the figure is closer to 1 day in 5.

So what happened? According to Unbiased.co.uk, credit card debt has dropped from £55.6 billion to £54.9 billion, but there’s been a huge increase in personal lending over the last year – personal loan levels have risen from £2.6 billion to £9.8 billion. As a result, British consumers are faced with interest charges of nearly £1.5 billion.

This time next year, will we be looking back on Debt Freedom Day 2009, or will we still be waiting for it? We can’t know for sure, but we’re seeing reassuring signs that people are starting to pay more attention to debt matters.

Hope for next year?
A recent study by Alliance & Leicester showed that debt problems have become a common topic of conversation – more popular than celebrities or sport events. While 40% of respondents said they’d recently spoken to a friend about the latest sporting match, a full 50% had discussed debt problems in the recent past.

It’s good to talk. Apart from reminding people that they’re not alone, it’s a great way for them to pick up good advice – and find out what could happen if they don’t take action to sort their debts out. They might also hear ‘real-life’ stories about the various debt solutions, which might prompt them to seek debt help and pinpoint the debt solution that might be right for them.

Debt management, for example, can be an excellent way to address the issue of unaffordable debt. Anyone can talk to a creditor and ask them to accept lower payments, reduce interest and / or waive charges, but many people feel more comfortable asking an experienced debt management company to do this on their behalf.

Or they might choose to pay off their high-interest debts with a single debt consolidation loan. This can seriously reduce their monthly payments, but there are downsides to this. It’ll probably take them longer to repay their debts, and securing any debt against a house can put that property at risk of repossession.

Finally, people in severe debt might consider an IVA (Individual Voluntary Arrangement) or even bankruptcy. As forms of insolvency, IVAs and bankruptcy both have their drawbacks, but they do provide a valuable way forward, giving people the chance to write off the debt they can’t afford to repay – and look forward to a debt-free future.

The housing market: shrinking growth, not shrinking prices

Mon, 10 Mar 2008 12:59:35 GMT

According to the Land Registry, the average price of a house in England and Wales fell by 0.5% in December 2007. This was the first monthly decrease since August 2005, and the largest since the Land Registry’s House Price Index became available in April 2000.

But the average price rose by 0.9% the very next month, and the average house was worth nearly £10,000 more in January 2008 than it was 12 months ago. That’s an increase of 6.4% – more than twice the 2.8% annual increase we saw in November and December 2005.

Since the occasional drop in prices is more than offset by the increases, house prices are still growing:

	Average (£)	Monthly change (%)	Annual change (%)
Feb 2007	176,319	0.9	8.3
Mar 2007	178,424	1.2	8.8
Apr 2007	178,891	0.3	8.8
May 2007	180,215	0.7	9.0
Jun 2007	180,835	0.3	9.2
Jul 2007	182,238	0.8	9.5
Aug 2007	183,065	0.5	9.7
Sep 2007	183,904	0.5	8.9
Oct 2007	184,821	0.5	8.5
Nov 2007	185,321	0.3	7.8
Dec 2007	184,398	-0.5	6.7
Jan 2008	186,045	0.9	6.4

The impact of 1%
On their own, percentages can be misleading: as prices rise, each 1% represents more money.

Today, after ten years of rapid growth, house prices are still far higher in real terms (i.e. taking inflation into account) than they were in the mid-90s.

In mid-2001, for example, when the average price stood at around £93,000, a 10% increase would have added an extra £9,300 to a house’s value. With today’s average price of £186,000, a 10% increase would be worth twice as much: £18,600.

Danger for homeowners?
The last six months have seen a lot of speculation about a ‘crash’ in house prices, based on a belief that prices are seriously over-inflated and bound to come down to a more affordable level.

It’s an unsettling thought for homeowners everywhere, even those who have already paid off all or most of their mortgage. They may be relying on their property to finance their retirement. Or, if they were thinking of consolidating their debts using a remortgage, they could suddenly have a lot less equity in their home to draw on.

Worse still, a crash could leave some homeowners owing more than their house is worth. This could prevent them from moving, as they wouldn’t be able to sell their home and repay the mortgage until house prices had risen again and / or they’d paid off enough of the mortgage to get rid of this ‘negative equity’.

Opportunity for would-be homeowners?
Would-be homeowners might be encouraged by recent housing market news. Lower prices could help them buy their own property without risking debt problems by borrowing more than they could comfortably repay.

But planning a purchase is never easy, especially as the Land Registry’s House Price Index isn’t the only one.

The Halifax House Price Index states that prices in the UK (not just England & Wales) came down in September, October and November. They rose in December and remained quite stable in January, giving an average price of £197,244 – 4.5% higher than a year previously.
The Nationwide House Price Index states that prices in the UK fell in November, December and January, bringing the average price to £180,473 in January – 4.2% higher than a year previously.

Different Indices work in different ways, but so far the three are pointing to reduced growth, not reduced prices. So would-be homeowners need to realise that house prices may not be growing as quickly as they were – but they’re still growing.

Diamonds are forever, but debts can become unenforceable

Fri, 29 Feb 2008 13:4:59 GMT

Everyone knows: when someone borrows money, they have a responsibility to make sure it is repaid. But not everyone knows that the creditor shares that responsibility.

The Limitation Act 1980 states that most debts can become ‘statute barred’ after 6 years (12 years for mortgages and secured loans). This means they become unenforceable – you still owe the money, but the creditor can no longer take action to recover it.

This can only happen if:

the creditor hasn’t contacted you (at your last known address) or taken action (e.g. court action) in that time
and
you haven’t made payments or acknowledged the debt in that time.

The Debt Collection guidance from the Office of Fair Trading (OFT) states that it is unfair for creditors to tell you the debt is still legally recoverable if it isn’t – or to push for payment if you’ve already disputed the debt and cited the Limitation Act. If a creditor does either of these, you should complain to the local Trading Standards Department or to the OFT.

However, please note that the Limitation Act 1980 contains various exceptions and a great deal of complicated legal terminology. If you think it might apply to one of your debts, it’s essential you seek advice from a debt specialist, so you can be sure you’re saying the right things and staying within the law.

6 years for most debts
Most debts can be declared statute barred if they’re left ‘untouched’ for 6 years. You may be surprised to hear that this includes Community Charge or Council Tax debts.

An example:
Imagine you took out a personal loan 10 years ago, but stopped making repayments after 3 years. Since then, you’ve not contacted them and they’ve not contacted you, even though you’ve not moved house. Then, yesterday, a letter arrived on your doormat requesting payment.

Since they’ve left it for 7 years, the debt is probably unenforceable – but you can’t simply ignore it. It’s up to you to seek debt advice and dispute the debt on the grounds that the Limitation Act 1980 means you no longer owe the money.

Note that the 6-year period can ‘reset’. In this example, if you’d contacted your creditor in 2006 and admitted the debt, the Limitation Act 1980 would not apply until 2012.

Exceptions to the rule
If a creditor has been granted a County Court Judgment (CCJ), the debt will still be enforceable, with the court’s permission, even if it’s more than 6 years old. But if the creditor got the CCJ after the debt itself had become statute barred, you can ask the court to set it aside.

The Department of Work & Pensions (DWP) has just 6 years to recover benefit overpayments and social fund loans through the court. But they don’t have to go to court to deduct money from benefit payments they make to you, so they can do this even if the debt is over 6 years old.

Student Loans are an unusual case, as they changed in September 1998. Any Student Loan taken out before this date was a consumer credit agreement, which means the Limitation Act 1980 applies. But any Student Loan taken since then is an ‘income contingent’ loan – so repayments can be deducted from your wages without any court involvement, regardless of how old the debt is.

Income Tax and VAT (Value Added Tax) debts never become unenforceable, however old they are.

A real-life mortgage story
Mortgages and secured loans cannot become statute barred until 12 years have passed – but this can happen, as illustrated by the following real-life story.

A Stockport man hadn’t paid anything to his mortgage since 1993 and was later declared bankrupt. His bank had not taken any action since 1992, and in March 2007 a judge accepted that his mortgage was ‘extinguished’.

The Limitation Act 1980 meant that the bank’s right to enforce the mortgage was ‘barred’. The bank had allowed more than 12 years to pass without taking legal action, so the property became legally his.

IVAs and Bankruptcies to rise in 2008?

Thu, 21 Feb 2008 16:42:33 GMT

This February, the Insolvency Service announced that the number of insolvencies (bankruptcies and Individual Voluntary Arrangements or IVAs) in England and Wales had dropped in 2007. After reaching an all-time high of 107,288 in 2006, the total decreased by 0.6% last year, down to 106,645.

So why are PricewaterhouseCoopers, KPMG and other experts expecting the number to climb back up again in 2008?

2007: a turning-point
At the start of 2007, people in debt had access to more ways of dealing with it.

As long as house prices kept on climbing, homeowners all over the UK could consolidate their debts by borrowing against this ever-increasing equity. And although tenants couldn’t turn to secured loans or remortgages, many of them had grown used to the idea of taking unsecured debt consolidation loans and / or moving their debt from one credit card to another.

Then, as recently as last summer, the situation changed. The decade-long boom in house-price growth came to an end, and creditors everywhere began tightening their lending criteria. Together with rises in the cost of living (from mortgage payments to food and petrol), these factors have put a considerable strain on many people’s finances.

The full impact wasn’t immediate. Towards the end of 2007, the number of new insolvencies actually fell. But as we enter 2008, many economists are predicting a gloomy year, with people on the brink of financial disaster discovering there’s no way back – and no way forward except insolvency (acknowledging that they can’t repay their debts).

When is insolvency the answer?
Debt doesn’t have to be a disaster, even when consolidation’s not an option. Every year, thousands of people join debt management programmes – asking a debt management company to negotiate with their creditors on their behalf. For those who just need time, patience and expert help to pay back what they owe, this can be an effective route out of debt.

But for people who cannot realistically repay their debts, insolvency can be the only choice.

Bankruptcy or IVA?
Bankruptcy or IVA? There’s no ‘right’ answer, as each case is different. What’s right for one person may not be right for another.

An IVA could be better for someone if they own a home, want to keep their financial matters private and / or work in a certain profession (see ‘Main differences’ table below).

But if their income is small, their debts are huge and their circumstances are unlikely to improve, bankruptcy might be the better option for them.

Main similarities

1	Bankruptcies and IVAs are both forms of insolvency
2	Both will seriously affect someone’s credit rating for 6 years
3	Both place strict limits on the person’s borrowing while they are in progress
4	Both allow people to pay what they can and write off the rest of their debt
5	Neither can write off some kinds of debt (e.g. secured debt, court fines & child support payments)

Main differences

	Bankruptcy	IVA*
Duration	Normally 1 year (payments can last for 3 years; a Bankruptcy Restriction Order can last 15 years, but this is for exceptional cases)	Normally 5 years
Effect on home	Very likely to have to sell home	Very unlikely to have to sell home; will probably have to release equity
Effect on career	Cannot work as (e.g.) solicitor, company director, local government councillor or justice of the peace	Some employers may refuse to employ an individual with an IVA
Publicity	Bankruptcy will be advertised in newspapers	Not advertised, but will appear in the publicly available Individual Insolvency Register

* For more on IVAs, see our ‘60-second guide to IVAs’.

Rumours about debt: be careful who you listen to

Thu, 14 Feb 2008 11:6:28 GMT

When we listen, we learn – but what exactly are we learning? Listening to rumours is always risky, and when they concern complicated issues with potentially serious consequences, the wrong advice could easily make a bad situation worse.

The issues that generate the most rumours, of course, are the ones that affect people’s everyday lives, so it’s no surprise that we’re surrounded by myths and rumours about debt. Let’s look at just five of them.

Myth #1 “Start by paying off your high-interest debts.”
It’s true that you should put your spare cash towards your highest-interest debts – but the key word here is ‘spare’. On a monthly basis, money is only spare if it’s not needed to pay off any of your commitments, from mortgage / rent to water bills and credit cards.

If you ignore some bills to pay off others more quickly, you could end up being taken to court, evicted or even imprisoned, depending on the type of debt you’re dealing with.

Myth #2 “Lenders won’t lend to anyone on the credit blacklist”
Creditors make up their own minds about granting you credit when you apply. Your credit report (maintained by credit reference agencies) will show them how you’ve handled your finances in the past. Although this will certainly influence their decision, it won’t tell them what that decision should be.

So there’s no ‘credit blacklist’ as such, but if you don’t look after your finances you’ll probably find that some creditors won’t give you credit, or will charge you more for it.

If you’re already in that situation, any adverse entries on your report (such as CCJs, arrears and defaults) will remain there for six years. You can’t have them removed before that time – unless the information is incorrect – but if you pay what you owe, they will be marked as ‘satisfied’. A ‘satisfied’ entry will show creditors that you’ve had some financial troubles, but you’ve now dealt with them.

Myth #3 “Debt consolidation is the same as debt management.”
Debt consolidation means paying off your existing debts with a new loan. Payments to the new debt could be smaller because the interest rate is lower, because the new debt is paid back more slowly, or both. However, the longer the repayment period, the longer you’ll be paying interest – so consolidating your debts could cost you more in the long run.

Debt management involves negotiating with creditors, looking for an affordable way to repay your existing unsecured debts. Some people do this themselves; others get a professional debt management organisation to do it for them. Some debt management organisations provide advice and self-help packs, while others will play a more active role: distributing payments to creditors and negotiating with them, asking them to accept lower monthly payments, freeze interest and waive charges.

Myth #4 “Bailiffs are just debt collectors with a different name.”
There’s a big difference between bailiffs and debt collectors.

Debt collectors collect money from people who aren’t paying their debts in the way they agreed. A debt collector can work for a creditor, collecting funds on their behalf. Or they might buy the debt from the creditor, which means the money is theirs to keep – if they can collect it. Either way, they must obey the same rules as the original creditor. It’s illegal for them to enter your home without permission, or to pretend to be court officials or bailiffs.

Bailiffs, on the other hand, are authorised to take away some of your possessions so they can be sold to pay your debts, although they’re not allowed to take essential items, children’s toys, or things that you can prove do not belong to you. On their first visit, they’re only allowed to enter your property if you let them in or if they find an unlocked door or window. But once they’ve been in, they have the legal right to force entry on any subsequent visits regarding that debt.

Myth #5 “An IVA is an easy way of avoiding bankruptcy.”
They’re both serious matters and both will seriously affect your credit rating. IVAs and bankruptcy are legal procedures that allow insolvents (people who are unable to pay off their debt) to ‘write off’ some of what they owe so they can clear their debt and make a fresh start.

An IVA might be better for homeowners, as it’s very unlikely they’ll be forced to sell their home – although they might have to release some equity in it. It could also suit someone who wants to keep their debt problems to themselves, as an IVA doesn’t get publicised or bar people from certain careers (as a bankruptcy does).

Bankruptcy normally takes one year, as opposed to the five years an IVA usually takes. If your debts are huge, your income is very small and / or you have no property to lose, bankruptcy may be the more appropriate solution for you.

Are overdraft charges testing consumers` patience?

Mon, 21 Jan 2008 17:04:36 GMT

Banks are businesses. Their objective is to make money. However, the way they go about earning their dough is now being put to the test in the high court after a number of complaints from consumers of unfair overdraft charges, which in turn caused debt problems to arise.

In the case, which has now started, the Office of Fair Trading (OFT) is challenging eight of the UK`s major financial institutions over charges which are applied once a consumer is overdrawn. The banks say such charges are entirely legal.

The outcome of the case could revolutionise the way banks - and their customers - go about their financial dealings.

A number of consumers complained to the OFT that the charges, which occur when the account is knowingly or unknowingly overdrawn, increased their financial problems and added to their debt worries.

In submitting its case, the OFT said: "The purpose of the application is to get a ruling on whether the provisions of the Unfair Terms in Consumer Contracts Regulations that deal with unfairness, apply to unauthorised overdraft charges."

However, the British Bankers` Association (BBA) - which represents banks and building societies - has stated that all charges levied on consumers are fair and within the law. It claims that consumers know the rules when they sign up to the various accounts.

A statement by the BBA said: "This is now an issue for the courts to decide. The judge will be considering various points and this will take a period of time, probably some months. We understand the interest, but it`s not time for speculation on detailed questions which the judge needs to consider. Now is the time to leave it entirely to the courts."

While all this goes on, consumers may wonder what all the fuss is about. However, the outcome of the case could influence how banks go about earning their money in the future. If banks cannot charge for overdrafts, they are likely to charge for other services - such as the currently free use of cash machines - in a bid to make up for the shortfall.

Despite this, a court case is the best way to sort out the grey areas which currently exist in the banking system, according to MoneyExpert`s Sean Gardner.

Mr Gardner commented: "The banks are starting to pre-empt the OFT by softening their terms and conditions, but the OFT mustn`t view this as an early victory.

"The only way customers can achieve a satisfactory, long term conclusion is by the OFT going to court. An out of court agreement between the OFT and the banks will only leave the waters muddy for the millions of customers reclaiming bank charges."

With around 50,000 claims for compensation being put on hold to wait for the outcome of the case, a lot rides on the high court decision. Whatever the outcome, it will affect consumers throughout the UK.

Debt problems making Brits `financially unfit`

Thu, 20 Dec 2007 09:58:28 GMT

We have all heard of obesity but a recent survey has found that over two-fifths of Brits are now financially "unfit". Debt problems throughout the UK have got so bad that a number of experts have declared that the country is on the verge of a debt "epidemic", similar to that which has been claimed of obesity.

The similarities between the growth in debt and the rise in obesity are striking. Over the past decade, the availability of easy credit has enlarged the debt boundaries, much like the alleged effects of fast food. As a result, debt problems have grown so much that, according to research by Abbey, only one per cent of Brits are "financially fit".

However, the problems are not purely down to the accessibility of credit. Many Brits have not partaken in financial exercise and moved to a cheaper mortgage company. A quarter of consumers have not shopped around for insurance quotes, while 70 per cent of women have no savings.

Sue Hayes, director at Abbey, suggests that, like weight problems, there is a general lack of effort on the part of the consumer when it comes to financial organisation.

Ms Hayes said: "The research suggests that the majority of people are in need of a financial workout to get their finances in peak condition for 2008. As many gear up to shift the pounds they pile on over the festive period, we would encourage people to review the financial products they hold and shop around to ensure that they are getting the most competitive deal available.

"Like exercise, a financial workout can take a bit of effort, but for most people the rewards are well worth the exertion."

So, like many keep-fit regimes, a kick-start may be needed to get Brits into financial shape. A timely push may come in the form of the credit crunch. Over the last few weeks, the effects of the autumn`s financial crisis have been passed on to consumers, meaning tighter credit conditions and fewer approvals on mortgages. Many people are tightening their financial belts when it comes to Christmas presents too.

Colin Jackson, director of Baronworth Financial Services, said: "The way things are currently and they have been for some while, people are finding it very tough to put money aside each month for long-term or even short-term savings."

Tim Moss, head of loans at moneysupermarket, stated that debt has become part of the British psyche for a long time and a large scale change needs to occur.

He added: "People need to be careful that the ease of getting credit doesn`t catch them out. It can soon spiral into a debt sentence. Forty years ago, being in the red was a last resort. It seems many of today`s Brits are much more accustomed to taking on debt - although being able to control it is quite another thing."

Like all fitness plans, it will require time and effort to fix the UK`s debt weight issues. Some consumers may be in for the long-haul. Recent research by Fool suggested that two-thirds of borrowers will take over seven years to clear a non-mortgage debt of £11,000. Interest rate cuts may help that time scale but many will be in for the long-haul.

As festive thoughts turn towards new year resolutions, the traditional view of getting fit may have to take on more than one meaning this year if consumers are to avoid an over-inflated financial waistline.

Consolidation loans - an effective solution?

Thu, 29 Nov 2007 10:14:37 GMT

According to Sainsbury`s Bank, over 40% of personal loans are taken out to consolidate debts. Debt consolidation is the number-one reason for taking out a personal loan, followed by home improvement and car purchase.

In fact, a recent study by Datamonitor indicates that consolidation is a key factor in the predicted growth of the secured personal loans market – in 2011, demand for secured loans is expected to reach £10.2 billion, an increase of almost 50% on today`s figure of £7.5 billion.

"For years," says a spokesperson for Debt Advisers Direct, "financial experts have advised consumers to reduce their interest payments by prioritising their debts, paying off those with the highest APR first. In many cases, a consolidation loan can also help people reduce the interest they’re paying, as credit cards, store cards and overdrafts are likely to come with higher APRs."

"However, by paying off someone`s unsecured debts, a loan like this does `free up` whatever credit cards, store cards and overdraft facility they have. It’s important to keep a close eye on their spending, or their unsecured debts can soon build up again. Before anyone takes out a loan, they need to look at how they spend money and ask themselves if they have the willpower to make any necessary changes to their spending habits."

As long as people resist the temptation to build up fresh debts, a consolidation loan can be an extremely effective way of bringing their debts under control without damaging their credit rating. It means that debt can be paid back over a longer term, so each repayment is less of a strain on the monthly budget. And it simplifies a borrower`s finances, reducing the risk of forgetting to make payments on time.

But it’s not the only solution to debt – and in some cases, it may not be the most appropriate: "For anyone looking to manage their debts, the first step should be to consider all the alternatives. Consolidation loans have helped millions of people get their lives back on track, but that doesn’t mean that consolidation is the right approach for everyone."

"A debt consolidation loan is a valuable solution, but it`s important to remember that there are others – some people might be better off joining a debt management programme, for example, or finding out about Individual Voluntary Arrangements (IVAs). It`s well worth taking the time to talk to an expert and find out as much as possible about the various options."

Housing market shivers as winter approaches

Wed, 21 Nov 2007 14:17:26 GMT

The UK`s housing market has somewhat of a reputation. When things go well, they go really well. When things go bad, they are terrible. After a number of years in which the average house price has risen sharply, the signs of change may just be beginning to show.

Over the last few years, predictions from those in the know have all read the same - house prices will increase. The average house is now worth £220,111, according to government figures.

However, now the market predictions vary wildly. A survey by the Department for Communities and Local Government shows that house prices are rising but not as sharply, while the Halifax House Price Index has property values falling by 0.5 per cent in October. Similar comparisons can be made with other surveys.

As a result, consumers are becoming more anxious about their financial commitments. While the interest rate rises have been halted by the Bank of England, they are still having an effect on businesses and, therefore, wages. Some in the industry are predicting that it won`t be long until the labour market forces house prices down.

The Royal Institute of Chartered Surveyors` (Rics) spokesman Ian Perry said: "The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most UK regions.

"A decline in transactions may be in the offing as stalemate returns to the market, although a material fall in prices would require a weaker labour market prompting forced sales"

Reasons for the slowing of the market are put down to the recent credit crunch, which hit financial markets around the world. One major victim of that period was Northern Rock, which is one of the UK`s largest mortgage lenders. A lack of consumer confidence in it and other lenders has made for a rocky road ahead.

Fionnuala Earley, Nationwide building society`s chief economist, commented: "The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity.

"The supply side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building."

Such shortages in housing are likely to keep house prices steady in some areas, at least for the time being. In Scotland, for example, house prices have risen 14.5 per cent in the last year, to an average of £168,559 - some £60,000 less than the UK average. Areas such as Aberdeen have seen an annual rise of 34 per cent. It certainly is not all doom and gloom across the UK.

Professor Donald MacRae, chief economist at Lloyds TSB Scotland, said: "There is no evidence of any crash in Scottish house prices. Rather, the Scottish housing market continues to show robust annual increases in excess of inflation."

There can be too much of a good thing though. Professor MacRae suggests that Scotland bucking the national trend may destabilise the market yet further.

He added: "The increase in Scottish house prices needs to slow. However, this will happen as a gentle slowing in price as opposed to an abrupt fall."

So, a drop in house prices may be needed after all. First-time buyers have seen themselves frozen out of the market, while rent on property has reached an all-time high. According to Halifax`s chief economist Martin Ellis, the economy may even benefit from a price drop.

"The UK economy is in a strong position. Sound market fundamentals, including high levels of employment and a shortage in the number of properties available for sale, will continue to support house prices."

Consumers across the country have, many times before, had to put up with the unpredictability of the housing market. It has a reputation for a reason. However, this time around, the signs are more positive than before. The chills of winter may just be what the house price doctor ordered.

Credit card cashback – the way to bigger debts?

Fri, 7 Sep 2007 9:17:19 GMT

The credit card market always seems to be in competition with itself to gain more customers. First, there was interest-free credit. Then, along came personalised credit cards, which could be designed to include football club logos or famous scenery. Now, it is all about cashback.

This week, Abbey launched a credit card which offers customers five per cent cashback on the first £1,000 of their supermarket shopping. The deal represents the biggest cashback amount on the market. However, are such offers truly good deals or are they leading customers into large debt problems?

As many as one-in-ten credit cards on the market now offer customers cashback on purchases. The average cashback offered on the cards, however, is 0.72 per cent, according to research from Money Expert.

While many offer small amounts of cashback, the launch of Abbey`s five per cent card is a sign that the market may be about to step up the pace.

Andrew Hagger, of Moneyfacts, told the Telegraph: "If Abbey consistently delivers deals that appeal to the mass market, for instance on shopping or petrol, then the card could well build up a reputation as a good one to opt for if you`re looking for cashback."

However, as with most aspects of the credit card, fears of surging debt problems put many off entering the market while those that do often have a large debt as a result. The temptation to get cashback with purchases, at the customer`s favourite store or supermarket, could add to the record national credit card debt.

Statistics from Credit Action show that the total national credit card debt for July 2007 was £53.5 billion, with an average interest rate per credit card of 17.27 per cent. As the national debt grows, so does missed repayments. More than 4.1 million credit card bills were not paid in the first six months of 2007, with each missed bill accruing a £12 charge.

Earlier this year, the industry regulator, the Office of Fair Trading (OFT), ruled that charges on missed credit card payments were "unfair" and capped them to £12. The OFT has also said it would look into complaints that interest rate calculation methods by credit card companies are "unbalanced".

However, despite the clamping down on other parts of the market which may harm consumers, there has yet to be any directive over the implementation of cashback by the OFT. This has led some to speculate that the temptation of cashback schemes may create bigger debt problems.

Keith Smith, of the London School of Business and Finance, said: "A cashback credit card is worth considering if and only if you pay off your outstanding credit card bill in full each month. If you don`t clear your credit card debt then any cashback you earn will be more than outweighed by the interest charges you incur."

While the cashback on offer from Abbey and others looks tempting, giving in to the temptation could lead to serious debt problems in the future.