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BankruptcyNews
Junior Member
358 Posts |
 Posted - 24 July 2007 : 10:43:43
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Deal with your debt while you still can
AS INTEREST rates rise and earnings growth continues to plateau, the more homebuyers and credit card holders are going to have problems meeting monthly debt repayments.
There have now been five 0.25% increases in the Bank of England's base rate over the past year, and most commentators are still predicting at least one more rise, taking the rate to 6%.
Some expect it to go higher still, although a few reckon that the Monetary Policy Committee (MPC) may now wait a few months before announcing a further rise, to allow the effects of the last five increases to feed through to the market.
According to the Council of Mortgage Lenders (CML), gross mortgage lending last month leapt to a record £34.2bn, compared with £31.4bn in May.
However, this will reflect buying activity a few months ago, as the mortgage comes right at the end of the process. And, says the CML, although lending is at its highest level ever, the size of the increase in June was lower than in either June 2006 or 2005.
The CML also voices concern about how the large slug of existing borrowers whose two-year fixes are due to end in September will cope in the new significantly higher rate environment.
Meanwhile, there are no signs as yet of a slowdown in credit card borrowing, with total debt now running at £54bn, despite increased pressure on mortgage payments, council tax and other household costs.
The best way to deal with galloping credit card debt is to take steps to rein it in before it becomes unserviceable.
Those for whom the worst has already happened have no choice but to consult a debt advice agency (Citizens' Advice Bureaux are still the best), but make sure the one you choose is non-profit-making and gives its services for free).
Those whose debts are still (just) under control should follow this plan of action:
• Consider tearing up all credit cards and start making the highest repayments you can afford each month. Don't limit yourself to the minimum repayment unless you really can't pay any more that month.
The more you pay, the lower the interest charge in succeeding months.
One of the most common reasons for getting into difficulties with credit card repayments is that interest charges have grown so much that you are simply paying interest on past interest and are no longer able to make a dent in the capital element of the debt.
• Don't be tempted to roll up your debts into a single loan. Monthly repayments on these so-called 'consolidation loans' may be lower, but this is normally because the borrowing period has been lengthened, meaning the total interest bill will be much higher.
More importantly, you are likely to be asked to secure the loan on your home, which should be a complete no-no. And, because the debts have been pooled, you will lose the flexibility to prioritise repayments if the worst happens.
Credit card debts are unsecured, which means you won't lose your house if you can't repay them.
• If your credit history allows, make use of one of the interest-free balance transfer offers on the market. You should then tear up the card to remove any temptation of getting further into debt, particularly if the offer includes zero interest on purchases too.
Virgin has just extended its 0% balance transfer offer from 13 to 15 months. Compared with the maximum 12 months offered by competitors, this is the best deal on the market.
• Direct debits are a good idea as they ensure you will never be hit by late-payment penalties. Cardholders have stumped up £50m for missed payments in the past six months alone, according to Moneyexpert.com, the cost comparison website.
Around 9% of all monthly payments are late or missed altogether. Penalties are now limited to £12 a month, after the Office of Fair Trading started throwing its weight around last year, but that's £12 more than you can afford.
• Avoid companies that limit the use of direct debits to either the minimum payment or the full monthly bill. You want the flexibility to repay as much as possible each month, so you should have the freedom to vary the amount you pay.
Minimum payments mean you end up paying a fortune in interest - and the lower the minimum, the more it will cost you.
According to cost comparison website uSwitch, 60 credit card providers now have minimum payment requirements below 3% of the total debt.
Someone making minimum repayments of 3% of the balance on initial borrowings of £10,000 would pay £1,130 less than someone who pays a minimum of 2% on only £5,000, says uSwitch.
• Don't lie to borrow more money. Not only is it illegal, you are also asking to get into further difficulties.
Lenders' criteria are already loose enough. If you don't even meet their relatively lax standards, you are in very real danger of landing yourself with debts that you just cannot repay.
Source: scotsman.com
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Deal with your debt while you still can
