debt FAQ

Alexander Pope wasn't talking about debt when he wrote "A little learning is a dangerous thing" - but listening to uninformed gossip is a great way to make your debts worse...

Debt is everywhere. As a nation, we've built up around £1.4 trillion of personal debt. It's hard to get through a day without hearing stories about getting into debt - or out of it.

There's a wealth of helpful hints and tips out there, but an equal number of dangerous misunderstandings that can help people get out of the frying pan and into the fire. Which is why we'd like to tackle a few of them...

Myth #1 "Always pay high-interest debts first."

If you owe £1,000 to credit card A (at 15% interest) and £1,000 to credit card B (at 25%), then yes - pay off card B first. It's costing you £100 more a year than card A.

However:

You're risking fines and damage to your credit rating if you don't make the minimum monthly repayment to every debt. If you can't afford to, talk to your creditors about lower payments.

If you can't keep all your creditors happy, pay your Priority debts first (rent / mortgage, secured loans, council tax, etc.), even if they have a low interest rate. If you don't, you might lose your home and / or get in serious legal trouble.

Myth #2 "Debt management = debt consolidation."

Debt consolidation means taking out a new loan or mortgage to pay off debts. This can reduce your monthly payments, but be careful: when you pay off credit cards or overdrafts, it's easy to run up fresh debts, making your monthly repayments higher than ever!

Debt management involves negotiating with creditors, looking for an affordable way to repay your existing unsecured debts. They might accept lower monthly payments, freeze interest or waive charges. You can talk to them yourself or ask a debt management company to do it for you.

Myth #3 "An IVA is better than bankruptcy."

It's not a question of 'better' or 'worse'. It depends what's right for you.

If you're a homeowner, an IVA could be better for you. You're very unlikely to lose your home, although you may have to release some equity. Just remember you'll have to spend five years making regular payments.

If you don't have any assets to lose, bankruptcy could be quicker and simpler - but (unlike an IVA) it will be publicised and could even affect your job, depending on the industry you're in.

Myth #4 "Bailiffs are just a kind of debt collector."

Bailiffs can be private professionals or employed by the court. They're authorised to take away your possessions so they can be sold to pay your debts. They're legally allowed to break into your home, although there are strict rules about this.

Debt collectors are not court officials. They're professionals who (guess what?) collect debts. They might have been hired by a lender to collect the money, or the lender might have sold them the debt. Either way, they have to follow the same rules as the original lender.

Myth #5 "I can't get credit. I've been blacklisted!"

There's no such thing as a 'blacklist' in the UK, but whenever you apply for credit, the lender will normally check your credit report. Telling them how much you already owe, how you pay your bills and so on, your report helps them assess the risk of lending to you. It doesn't tell them whether or not they should lend you money - that's their decision.

Be aware that whenever you apply for credit, the lender has the right to see your report. If you don't keep your finances in good shape, you could find it harder, and / or more expensive, to get credit.

Melanie Taylor is associated with ThinkMoney.com. For more information about debt management, debt advice, Individual Voluntary Arrangements (IVAs), basic bank accounts with a debit card facility, loans and remortgages, please visit http://www.thinkmoney.com/

As a nation, we love to talk. At home, on the bus, at work, on the phone: even when we're not actually talking, we're texting, e-mailing and chatting through blogs, instant messaging and social networking sites.

It seems there's no end to the ways we'll communicate - and no limit to the things we'll talk about. Or is there? When fool.co.uk asked over 1,500 people about attitudes to money, a full 66% felt it was a personal subject and best kept private. 30% even felt that it was rude to talk about money.

Yet finance is a huge part of our lives. If people weren't so interested in money, the media wouldn't be so full of stories about making, managing, saving and spending it. It's as though we're eager to listen, but not to talk.

Maybe keeping quiet about our own finances is just part of our national identity. Perhaps we feel like we're boasting when we share good news, or looking for pity when we share bad news.

Silence is golden, but...

According to uSwitch, around 23% of the UK's residents say their borrowing is unmanageable or nearly so. And Unbiased.co.uk reports that over two and a half million don't even know how much they owe!

If we were better at talking about our debts, there's a good chance we'd be better at managing them. After all, pretty much everyone has some kind of debt, whether it's a mortgage, a loan or an outstanding bill. The more people keep their debts to themselves, the less they'll learn from the experiences of others.

If they were more open about their finances, they might be surprised to find out how many friends and acquaintances are in the same situation. They might feel less embarrassed, and pick up some useful tips on budgeting, debt management and legal rights, or find out what '25% APR', 'payment holiday' and debt consolidation actually mean in real life.

They might also act more quickly when they need professional debt advice or help, and that's something that everyone would recommend, from government representatives and charities to public bodies like the Legal Services Commission.

Learning to loosen lips & tighten belts

Another thing we're all agreed on is the need for more education - a particularly important kind of communication. A recent report from youth charity Rainer discovered that 77% of the UK's under-21s already had experience of being in debt, with one in five passing the £10,000 mark.

So it's encouraging to see moves by the government and industry professionals to prepare tomorrow's adults for an increasingly complex financial world. From 2008, for example, the core GCSE mathematics curriculum will include personal financial education, helping pupils learn to manage their finances and live within their means.

And the Association of Business Recovery Professionals, known as R3, has developed case studies and other classroom materials designed to enhance pupils' financial judgment. As Insolvency Practitioners, its members have seen too many people overwhelmed by debt, and they're going into schools to share their experiences with 16-18 year-old pupils, teaching them about credit, debt and money management.

People all over the world are affected by debt, but it seems that UK residents are particularly likely to suffer in silence. Hopefully, initiatives like these could help us get over our reluctance to talk about debt. They might be aimed at youngsters, but they could easily benefit parents - at least the parents who ask "what did you learn at school today?

Melanie Taylor is associated with Gregory Pennington. For more information about debt advice, debt consolidation, debt management, Individual Voluntary Arrangements IVAs, basic bank accounts with a debit card facility, loans and re-mortgages, please visit www.gregorypennington.com.

In the last six months, almost half of all applications for credit cards have been turned down. Although rejections are a normal part of the application process, industry experts point out that they've risen 17% since mid-2007. For people who rely on easy access to credit, it's a symptom of the credit crunch that promises tough times ahead.

Looking further ahead, though, the credit squeeze could push some to take the necessary steps towards a more stable future that's less reliant on easy credit. After all, paying bills with credit cards - and paying off those cards with more cards - is no long-term solution. Being refused a card can be the trigger that makes someone tackle their debt, rather than trying to ignore it.

The first step, of course, is finding the debt solution which meets their needs. With personal debt standing at an all-time high of £1.4 trillion, today's media are full of stories about debt solutions - success stories and sob stories alike.

What are the options?

There are debt management organisations that help borrowers negotiate reduced repayments with their creditors. There are also Insolvency Practitioners who provide Individual Voluntary Arrangements (IVAs), helping people write off the debt they can't afford to pay back.

And many see debt consolidation as the way forward, allowing people to replace all their debts with one new debt, lowering their monthly repayments to a more manageable amount. What's more, consolidation loans / remortgages provide a way of tackling debt without damaging credit rating - all the original debts are paid in full, so there's no question of defaults.

However, some see consolidation loans as a mixed blessing, since they leave borrowers free to run up new debt on the credit cards, store cards and overdraft facilities that got them in trouble in the first place.

The one thing that everyone seems to agree on is that there's no universal 'silver bullet' for debt. Everyone's situation is different, so anyone who finds themselves in debt needs to think carefully about their options, and look for some impartial advice.

And if they don't? Choosing the wrong debt solution (or doing nothing at all) can make things worse, pushing them deeper into debt, hurting their credit rating or both.

What's the forecast?

As expenses like mortgage payments and council tax keep on increasing, people are looking to stretch their income further and further. And recent increases in oil and food prices have driven inflation above the Bank of England's target of 2 percent, leading economists to express doubts about any cut in interest rates before the end of the year.

The effects might not be immediate, but the Council of Mortgage Lenders believes that repossessions could rise by 50% in 2008, reaching 45,000 by the end of the year. And 170,000 people could find themselves more than three months in arrears, an increase of 17% on this year's figure.

As with any prediction, it's important to remember that these figures aren't set in stone. Of those 215,000 people, who knows how many will take steps today to avoid becoming a statistic next year? With good judgement and good advice, they might all move in the right direction.

Melanie Taylor is associated with Debt Advisers Direct. For more information about debt advice, debt consolidation, debt management, Individual Voluntary Arrangements (IVAs), managed bank accounts with a debit card facility, loans and remortgages, please visit http://www.debtadvisersdirect.co.uk/.