Problems of Debt Settlement and Credit Rating

Debt settlement is the option of seeking to reduce debt, by allowing a debt settlement firm to negotiate a reduction in your debt. It can be an attractive option for those with a huge debt problem. Debt settlement is primarily aimed for those with over £15,000 - £20,000 debt. It cannot be used for negotiating secured loans like mortgages. Some evidence of financial hardship is required.


Problems of Debt Settlement

1. Damage to Credit Rating

Your debt settlement will involve a deal, where your creditor agrees to accept a small % of the loan. The creditor will then say that the loan is settled in full, rather than paid in full.

However, settled in full, is not the most damaging effect on your credit rating. It is better than missing credit card payments or being unable to pay off your debts. Also, if you do pay off your debts, in the long term your credit rating will improve. 35% of credit rating depends on how much you owe.

2. Debt Tactics

To get a better settlement, some debt settlement companies may encourage you to stop making payments to credit card companies. When payment is withheld it makes it easier to gain a bigger reduction in debt. However, this is a high risk strategy, if you do withhold payments to credit card companies it will severely damage your credit rating. This type of action is really only advisable for people close to bankruptcy and are not concerned about credit rating (Perhaps it is too bad anyway)


3. Interest Charged by Debt Settlement

Interest charged by debt settlement companies can be higher than credit card companies. However, the monthly debt payment will be less because they reduce the total debt paid.

4. Can you afford the Debt Settlement repayments?

Debt settlements do not mean your problems are solved. Unless you tackle the underlying causes of debt, you may struggle to meet the debt repayment to the debt company. Make sure you take out a policy that you can afford.

5. Possibility of Law Suits.

This is only a possibility if you stop making payments before the debt settlement has been arranged.

6. Disreputable Company's

In the 1980s and 1990s financial deregulation led to a huge explosion in the number of debt settlement companies, some of these companies had dubious track records. However, debt settlement agencies are now regulated by the FSA. Check out the company you choose carefully; look to see whether it has had a lot of complaints


see also:

Debt settlement

Top 10 Tips for Reducing and eliminating Debt.

1. Don't Ignore your debt problem in the hope it will disappear.

It is a mistake to try and forget or ignore the problem of debt. It may seem unmanageable, but if you take a clear and focused attitude you can regain control and work out how to best manage the existing debt.

2. Always Try to Meet Minimum Payments.

It is very important to maintain the best possible credit rating. Therefore, it is important to make minimum payments on time. If it is a real problem, speak to your loan company and explain the situation. At least, you may be able to miss a payment, with less damage to credit rating.

3. Debt Consolidation.

There are various ways to consolidate debt. However, the basic rule is to try and pay off debts with the highest interest rate first. It may be possible to consolidate high interest debts into a lower interest debt. If possible, this avenue should be explored. If you own a house, you will be able to have a secured debt consolidation; this will have a lower interest, but at the same time, means your house is liable to repossession should you fail to meet debt payments.

4. Debt Counselling.

If you find your debt very stressful and you don't know how to manage, it is advisable to speak to an independent debt adviser. A good debt counsellor will be able to look at the problem with less emotion and more detachment; with their experience they will be able to suggest various options to reduce and eliminate debt. Often an independent counsellor may be more appropriate than friends and families as there is less emotional attachment.

5. Debt Settlement

This is a potential solution for those with very large unsecured debts. It is a solution with debt settlement companies find an agreement to reduce your debt. They negotiate with your creditors to pay upto 50% less than your total debt. The debt is then said to the "settled in full" . There are potential drawbacks of debt settlement, for example, it will have some impact on your credit rating It is not something to be entered into lightly, however, it can be a much better alternative to bankruptcy. See: Debt Settlement

6. Increase Income.

A second job is a way to be able to save extra money. This can be used to actually reduce your total debt, rather than just adding to your debt. In the long term you will save twice; not only will you benefit from reducing your debt, you will also save on interest payments.

7. Reduce Spending.

If we look closely at our spending, we may be suprised at where our money goes. For example, the TV programme, big spenders, showed in graphic fashion how much people were spending on inessential items. One girl, was spending £2,000 a year on take away coffee and pastries. In the majority of cases, those with large debts seriously underestimated the amount they spend on certain things. If you make yourself write down what you spend your money on in a week, you may be surprised at where you can easily make savings. Not only that, but people found they were much happier for reducing inessential spending.

8. Don't Panic.

Why is the Hitchhikers Guide to the Galaxy the best selling book in the universe? Because it has in bold letter on the front the reassuring phrase "DON'T PANICn" When we panic we magnify our problems, and take a negative attitude that the problem is insolvable. This is not the case, if we are determined to improve our situation, we can start to make a dent into our debt problems.

9. Remortgage.

For those who are home owners, remortgaging enables a consolidation of debts into a low interest loan (mortgage). This is a good option; however, you need to be careful you can meet the repayments. A fixed rate mortgage may be a good idea to make planning easier.

• Remortgage for debt consolidation

10. 0% Credit Cards.

If your credit rating enable you to take out new credit cards, take advantage of cards which give the option to transfer large amounts of debt to a 0% or low interest bearing card. If some credit card companies refuse you, don't give up. Keep trying, some credit cards accept worse credit ratings than others.

See also:

• Top 5 Tips for Reducing Mortgage debt
• Improve your Credit Rating - top 10 tips
• More advice for reducing debt burden
  

How to Manage Large Debts

If you are struggling to cope with large debts it can be quite demoralising and stressful.
I wrote this guide, 10 Tips to reduce and eliminate debt, primarily for people struggling to meet credit card and loan debts.

If you have a mortgage, in addition to loan and credit card debts, it is worth considering whether you can remortgage to consolidate your debts under a lower interest rate, mortgage loan. If this is not possible the advice in the above guide may be of some help.

Debt Settlement and Debt Reduction in UK

• Do you have unmanageable debt problems?
• Do you owe more than £15,000?
• Is it no longer possible to get new loans and credit cards?
• Are you considering declaring bankruptcy?

Debt Settlement companies may be able to help. It is a way to reduce your debt and potentially avoid bankruptcy.

Note, I am not trying to promote any company or even recommend this strategy. I have not done it myself, but it could be a viable solution to serious debt issues. It is highly advisable to take independent financial advise from a qualified debt adviser. This is just my understanding of how debt settlement's work

How Debt Settlement works.


A debt settlement company will negotiate with your banks and lending companies. It negotiates a settlement so that they will pay off your debt on your behalf. However, they will negotiate to pay only a certain % of the debt, in return for a one off payment. In return for getting this one off payment, the bank agrees to tell credit agency's that you have cleared your debts. The debt is said to have been "settled in full". However, note this is slightly different to "paid in full." see problems of debt settlement.

Basically the debt settlement companies negotiates a way to pay only a % of your debt.

Therefore, if you owed £20,000 to several companies and several credit cards, you could now owe just £10,000 to the debt relief company.

Then over a period of a number of years you pay a set monthly amount to the debt relief companies until your debt is paid off.

Benefits of Debt management companies.

1. Your creditors get at least a certain % of the amount you owe them. It is better than getting nothing if you were to be declared bankrupt.
2. The Debt relief company will benefit from charging you interest on the remaining debt they negotiate.
3. You benefit from having:

• less total debt
• the ability to wipe clear credit.
• Avoid Bankruptcy
• Just one loan to pay, rather than several
• the chance for a new start and the potential to be debt free in 5 years or so.

Potential pitfalls of Debt settlements

• When getting a debt settlement, check the interest rate they will be charging.
• Look at the monthly payments, is it a realistic objective to pay that much
• This is probably a last ditch solution. It is preferable to avoid getting into this situation in the first place.
• Debt settlement doesn't mean you can just ignore the problem of underlying financial problems. Look into how such debt can be avoided in the first place.
• Can Harm Credit rating: See problems of debt settlement
  

Related links

• Debt settlement for reducing debt
  
• Why Has debt increased in the UK?
• Top 10 Financial tips for saving money
• Remortgage for debt consolidation
• 10 Tips for reducing debt burden
  

Related Debt management companies

• Franklin Debt Relief
• Credit Card debt reduction
• Solve Debt Problems

• Debt Settlement at Wikipedia
• Problems of Debt Settlement - Does it harm credit rating?
  

Why has debt Increased in the UK?

• UK debt currently stands at over £1.1 trillion.
• Average Personal Debt (Credit Card, overdrafts and personal loans) = £3,170
• note in Europe average personal debt only accounts for £1,588
• Average Mortgage debt = £21,000
• (note this is much higher than European Average) (Source 1)

Causes of Increased UK Debt

1. Lower Real Interest Rates.

Compared to the 1980s long term interest rates in the UK have fallen. For example, in 1992 interest rates reached a peak of 15%. During the past 10 years the average interest rate has been around 5%. (In 2005 they reached a record low of 3.5%.) Lower interest rates makes borrowing cheaper. Due to the Bank of England's independence people now expect lower inflation and hence lower interest rates. The B of E now set interest rates and have been relatively successful in keeping inflation within the government's target of CPI = 2%. Therefore with inflation under control, there is less need for interest rates to rise as suddenly as they did in the late 1980s, Lawson boom.

2. Changing Social Attitudes to debt.

In previous generations saving was praised as a virtue; thrift and conservatism were seen as good things. In modern society the idea of borrowing is much more prevalent. This is due to a combination of factors, which are hard to separate; however, one significant reason is the increased availability of credit.

3. Increased availability of Credit

In the past 2 decades the financial service markets have been liberalised, increasing competition between lenders. This has enabled an increased choice of loans and credit cards. Therefore an increasing number of people have taken advantage of services like, interest free overdrafts and credit cards. For example, credit cards with introductory fees of 0% have made borrowing cheaper and more attractive.

4. Changes in Mortgage lending.

The Major mortgage lenders have relaxed their criteria for lending money. In the past they used to use a strict income multiple; for example a maximum loan of 3 times income. Now some major banks are willing to lend upto 5 times income. In addition, there are new types of mortgages which have enabled first time buyers to get larger mortgages. These include interest only, 50 year mortgages and increased use of self certification mortgages.

5. Chip and Pin.

Financial Service group uSwitch argues the introduction of chip and pin credit card machines have increased the willingness of consumers to take out extra cash on credit cards - this is despite the high interest charged on these cash withdrawals. Cash withdrawals on credit cards totaled £5.4 billion last year (2)

6. Greater Political and Economic Stability.

The UK has witnessed a long period of political stability. Since 1992 the economy has avoided a boom and bust situation. Therefore memories of a recession in the UK are fading; people are more confident and don't expect things to go wrong. This is an important reason for increased willingness to borrow.

7. Booming Housing Market.

The continued strength of the UK housing market is a significant factor in maintaining the increased levels of debt. Most measures of house prices suggest house prices have doubled in the last 5 to 6 years. Rising house prices enable increased debt, because people can take out secured loans against the value of their houses. In addition mortgage equity withdrawal has been increasing; mortgage equity withdrawal occurs as consumers take advantage of rising wealth to enable higher spending.

8. Poor Information on Financial Details

Leading experts from CRESC argue that many consumers have poor information about the debt they are getting into. Many consumers with high levels of debt may not even be aware of their debt levels and the interest they are paying. Professor Williams comments that "Most people don't have the competence to deal with complicated financial problems and would have difficulty explaining even APR (annual percentage rate of interest)". He goes onto say that financial illiteracy is a major factor behind increased debt levels (3)


References

• Record Debt Levels in UK

1. Britain's Debt Crisis
2. Chip and Pin Increases debt
3. Debt in Modern Society

Top Tips for Reducing Debt Payments

The most important thing is to try and avoid missing statements and having unauthorised overdrafts. Always maintain the minimum payments and always try to pay off the high interest bearing accounts first. If possible try to consolidate your debts in one place where you can get the lowest interest rates.

6 Tips for Reducing your debt Payments

• Make a list of all your debts, write down how much you owe and what interest you are paying. This will include things like student loans, bank overdrafts, credit card loans.

• If you are borrowing money at a high interest rate this is the first loan to try and pay off. If appropriate you could try switching the loan from one place to another. E.g. if you are paying 17% on a credit card. You may be better off to take out a personal loan of 7%.

• Make sure you avoid any unnecessary penalties. If you are struggling with repayments you may be surprised at how accommodating banks might actually be. It is important to try arranging an overdraft before you go overdrawn. Otherwise you will pay both a higher interest rate and penalty charges.

• One of my top tips for avoiding high credit card debts is to periodically take out a credit card, which offers 0% interest for the first 6 or 9 months. At the end of the 9-month period you can switch the balance to a new credit card. This is a way to juggle £3-4,000 without paying any interest. When you buy expensive things put it on your credit card and avoid going overdrawn. I use this system to make sure I never have any cash flow problems and don’t need to arrange an overdraft. Some credit card companies charge a fee of 1-2% of balance transfers. In effect this means the 9 month loan is like having a 3% interest rate, but 3% is much more reasonable than 17%

• If you ever make a late payment on your credit card or go overdrawn. It is very important that you immediately ring up your Credit Card Company and bank. Or if appropriate you could write them a very nice letter. Say that you are always a good payer but very unfortunately your last payment seems to have got lost in the post. I have done this on a couple of occasions when I forgot or it did get lost in the post. The credit card company has always agreed to repay the penalty. Also very importantly they do not hold it against your credit rating. It is very important to try and maintain a good credit rating, if you miss a couple of payments it will become more difficult to get credit cards in the future, or you will get charged higher interest payments.

• If the debt seems to be getting out of control it may be worth going through your financial situation with an adviser or somebody who can offer calm advice. Often you may find the situation is not as bad as you feared, with certain changes often you can reduce the debt burden quite considerably.

Conclusion.

The most important thing is to try and avoid missing statements and having unauthorised overdrafts. Always maintain the minimum payments and always try to pay off the high interest bearing accounts first. If possible try to consolidate your debts in one place where you can get the lowest interest rates. Also it is important to consider your spending and income patterns as this is the root cause of debt

Top 7 Financial Tips

PERSONAL FINANCE TIPS


1. ‘Neither a borrow nor a lender be’

Or if you must borrow try get a cost effective deal.
Start by asking your bank for an overdraft facility before you need
it. Overdrafts only cost whilst you are using them but personal loans have interest charges all the time.


2. Make Sure your Bank Account pays a good interest.

Don’t lend money for free to your bank.
Current account balances often pay low or zero rates of interest.
Get a savings account transfer arrangement in place.
Even better if you have a mortgage get any cash balances included in an off setting arrangement so you pay less mortgage interest and get to repay the debt sooner

3. Pay your credit card bill in full each month by the due date.

The cost of not paying off the full bill is usually very high.
Chose a card with a refund or points – card companies charge retailers up to 5% to process your bill & customers are paying that indirectly.

4. Keep One Credit Card just for Internet Shopping

Keep one card exclusively for internet shopping to keep a track
Check you credit card statement every month
If your credit card has an interest free period they expect to make money out of you in the future so don’t be lulled into sloppy ways.

5. Cheap offers
These run out or have strings –‘ there are no free lunches’.
Buying in bulk or out of season can create savings
Internet purchases are not always cheaper

6.Warranty's on Electrical good usually too expensive

Be cynical about offers such as warranty insurance on new electrical goods.

Is the premium worth spending on the off chance you may need a
replacement or repair.
If goods are faulty you have rights to claim anyway under the Sale of Goods Act.
Think what else you could be doing with the money.
100% of your money back in a few years are deals that rely on you not claiming or messing up the conditions to claim which are so onerous.

7. Look into Remortgaging.

If you have a mortgage at the standard variable rate look at the possibility of Remortgaging, you could save yourself a lot of money in the long term.

Improving your credit rating - Top Ten Tips

1. Get hold of your credit report and check it for accuracy. Your credit report holds all details about different loans and repayment histories. Lenders use this when deciding whether to make loans or not. If you see anything is wrong inform the relevant authorities and seek for it to be amended.

2. Be careful about apply jointly for loans with other who have a bad credit rating. This will adversely affect your own chance of getting the loan.

3. Manage finances carefully. Always seek to avoid making late payments. For example a good piece of advice is to set up monthly direct debits which pay the minimum balance on your credit cards.

4. Communicate with your bank and loan companies. Banks are not as bad as we might fear. If we are suffering temporary difficulties it is worth speaking to them to try and arrange a temporary overdraft or loan. Arranged overdrafts and loans may incur interest but they do not adversely affect your credit rating.

5. If by accident or chance you do make a late payment on any loan. The first thing to do is to send the payment straight away. Then you should contact the financial institution and ask them very kindly to consider forgiving your transgression. You may be surprised at how often they are willing to make exceptions. You could always use the excuse “it got lost in the post”

6. Protect your identity. Identity theft in the UK is a growing problem in the UK. According to the government it costs £1.7bn, though this may be an understatement. Take steps to avoid your identity being stolen. If there are any problems make sure it hasn’t unfairly affected your credit rating. Stop identity theft

7. Don’t bother with credit repair companies. This is nothing that legally they can do to change your credit rating.

8. Consolidate loans. Consolidate your loans into the lowest interest bearing one possible. This makes it easier to keep track of payments and will also save you interest payments

9. Avoid overspending. Unfortunately the easiest way to protect your credit rating is to be frugal and careful in your spending so that you don’t go into debt in the first place.

10. Always tell the truth. If you lie on forms you will be found out, and this will count against you.



See also Ten steps to a better credit rating at Moneyfacts

UK Debt levels continue to rise in 2007

The UK is experiencing rising levels of debt. However evidence suggest the pattern of debt is shifting from credit cards to personal loans. The level of mortgaging lending continues to rise and remains by far the biggest type of borrowing. The increased value of houses has enabled more secure loans to be taken out against the value of the house.

Credit card companies have become increasingly picky about which customers to give cards to. This has reduced the number of bad debtors, it has also reduced the number of people with credit cards. The number has falled from over 11 million to 9.8 millionPayment default was a reason for Barclaycard reporting significant falls in profit, though it claims the worse is now over.

According to Euromonitor International, the average amount spent on credit cards fell for the first time ever. In 2005, the typical spend per person was £1,978 - but in 2006, it was £1,900.

Credit cards were traditionally seen as short term loans and it suggests people are getting wise to the high APR charged by credit card companies


See also: WHy debt has increased so much in the UK

Why has personal debt increased so much in the UK?

Reasons for higher Personal Financial Debt in the UK


1. The % of mortgage debt payments have increased as a % of disposable income. This is mainly because house prices have risen faster than the rate of inflation. In the past decade average UK house prices have risen from £64,692 to £181,122 (source Money Net) However average incomes have only increased by less than 100%

2. Ending of mortgage interest relief. Mortgage repayments used to attract significant tax savings for couples who were married, this policy has been ended.

3. Many household bills have risen faster than the rate of inflation. In particular council tax bills have hit many homeowners more than non homeowners. Last year rising energy bills were also a factor.

4. Low interest rates have made it more attractive to borrow money. When interest rates were much higher (15% in 1992) there is clearly a very strong disincentive to borrow money. However as interest rates have fallen considerably (currently 5.25%) people are much more willing to take out loans and increased mortgage payments. Also interest rates seem more stable and tend to only change in increments of 0.25%

5. Increased willingness of banks to lend. E.g the number of banks offering mortgage multiples more than 5 times income


Financial Tips for saving Money

How to reduce mortgage Interest Payments