Make Tackling Debt A Priority
Housing charity Shelter claims that more than two million people have already used credit cards to pay monthly mortgage or rent payments, which could threaten their homes in the event of illness or unemployment.
At The Money Advice Trust (MAT), the charity working to improve the quality of personal financial advice through free services like the Consumer Credit Counselling Service, National Debtline, Payplan and My Money Steps, there are fears 2011/12 could see record numbers in distress.
The double whammy of rising interest rates and rising unemployment, notably in the public sector, could be a deadly cocktail.
MAT chief executive Joanna Elson says: “In 2010, one in every 33 adults sought advice from charities such as Citizens Advice and National Debtline - a total of 1.4 million people.”
“Our research suggests a 2% rise in unemployment, which has been independently forecast, will lead to a record level of demand for debt advice at a time when local councils are likely to cut funding for it, and the funding from the Government’s Financial Inclusion Fund will also come to an end.”
So how can families survive the squeeze? Firstly, they must acknowledge the problem. According to finance website moneysupermarket.com, more than a third of Britons worry about their current or future financial situation on a daily basis.
Kevin Mountford, the website’s head of banking, says: “It is worrying that so many people feel their finances are out of control and they don’t want to take a little time to put things right.”
“People may feel pressured to ‘keep up with the Joneses’- but coupled with inertia and lack of understanding, these forces ensure that many people scared about their finances don’t actually do anything about it.”
A survey from insurer Scottish Provident says Britons only regard themselves in serious financial difficulty when their personal debts top £15,800. Among 18- to 34-year-olds, that figure rises to £16,650.
The survey found the highest ‘regional debt threshold’ is in the West Midlands, where personal debts can go as high as £17,100 before they trigger concern. The Yorkshire and Humberside region has the lowest tolerance, with a figure of £13,459.
Scottish Provident offers Income Protection policies to provide financial support for a specified period when unemployment strikes. But people under pressure can struggle to afford the cost of monthly premiums.
When their finances eventually crack, most people have a choice: either use one of the charities operating under the umbrella of the MAT, or pay for the services of a private debt management company.
In some cases, stricter budgeting can do the trick. More serious cases require a Debt Management Plan or an Individual Voluntary Arrangement as an alternative to bankruptcy.
Elson at MAT says: “It can be difficult to prescribe at what point consumers should seek advice about their debts. Perhaps the best answer is that if you are considering whether or not you need help, that’s indication enough that help may be required.”
“We recently launched a free, online debt advice service called My Money Steps, for people who want help in balancing their budget and an action plan to deal with their debts.”
“Some who don’t feel their problems are sufficiently acute to book an appointment with an adviser may have fewer qualms about going online.”
“We hope the service encourages people to seek advice early, as the earlier people face debt problems, the more options they will have.”
The image of private debt management companies was severely dented when the Office of Fair Trading looked at 172 firms in the sector and ordered 129 of them to take immediate action or risk losing their credit licence.
The magazine Which? Money hammers private debt management companies, alleging their fees now exceed £250 million a year.
“Mis-selling, cold calling, misleading advertising and a litany of inflated claims about how easy it is to write off your debts are among the tactics some of these companies employ,” it says.
“Some even use lookalike names to trick consumers into thinking they are dealing with a debt advice charity and almost all of them charge high fees.”
Steve Rees, managing director of personal insolvency specialist Vincent Bond, believes many criticisms have arisen because new firms have poured into debt management in recent years.
In practice, he argues, there is no clear-cut division between free and fee-charging firms. “When plans to tackle debt are drawn up and carried out, there is usually a payment required; when services are free to clients, the creditors are often paying. Does that mean the plan could be more favourable to the creditor?”
“The vital thing is that anybody needing help gets clear advice detailing all the possible options,” he says. “Whether or not fees are paid, it is important to freeze interest charges early on, so debts are paid off more quickly.” “There is also the consideration that clients who pay might get better access to their advisor than those who use charities,” Rees adds. What is clear is that anybody feeling pressure on their finances should already be looking at firms which provide help for nothing, and those who charge. Unofficial ggest that more than 1.7 million households could seek outside help this year - getting on for triple the total of five years ago.
Dealing with debt: The Money Advice Trust top 10 tips
1. Don’t ignore the problem - the sooner you get advice about debts, the easier it will be to deal with them.
2. Get free advice - think carefully before using a fee-charging adviser when free, independent help is available.
3. Don’t borrow money to pay off debts without thinking carefully - always take advice before making this step.
4. If you have lost your job, or are off work because of illness check if your payments are covered by payment protection insurance. Read the small print of policies.
5. Claim all the benefits you can - go to www.direct.gov.uk and look at the money, tax and benefits section. Also visit www.turn2us.org.uk.
6. Work out a budget to decide how much you can put towards repaying debts. A money adviser can help construct a budget, or visit www.mymoneysteps.org.
7. Find the best option for dealing with debts - a money adviser can identify the options and their implications.
8. Tackle priority debts first - some are more important than others. For example if you fall behind on mortgage payments you could lose your home.
9. Take action fast - after you have decided your route back to financial health.
10. Don’t struggle on your own - free, independent advice is available from various organisations.