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.

Top 10 Personal Tax Tips

Tips to help save tax and penalties from Tax


1. Be aware of your Tax Situation. Learn a bit about taxation it may save you money over the years. Don't put off looking into tax, even if you dislike the ida.


2. ISA Accounts. Interest you receive is generally liable for taxation unless you save in an ISA. So save in an ISA, up to £3000 each tax year can be saved, you can get instant access, a good rate of interest and don’t have to give a % to the tax man.


3. Gross Interest. Because interest received is generally taxable the tax man has arranged to take his cut before you get your interest. Banks and building societies take tax off your interest automatically. If you have low income or don’t pay income tax then register with your bank to get ‘Gross’ interest – that is interest with out tax.

4. Ask For Refund. If you haven’t registered for gross interest or think you have paid too much tax then ask your tax inspector for a refund at the end of the tax year 5th April.


5. Share Personal Allowances. Everyone has a personal tax allowance. This is the amount of income you can have without paying any tax. Make sure any interest received is paid to the partner with unused allowances.

6. Check Tax Code. The Inland Revenue make lots of mistakes so check you tax code. This is used by your employer to calculate how much tax to deduct form your wages. Guidance is available on www.hmrc.gov.uk understanding your P2 PAYE Coding Notice.

7. Changed Circumstances. If your circumstances have changed since completing a tax return tell the revenue.

8. Special Tax exemptions. There aren’t many special allowances or expenses but professional subscriptions, union agreed trade allowances and some ex-gracia expenses are allowed against tax if you claim them.

9. Avoid Penalties. Send in you tax return promptly and avoid penalties. If you do get a penalty, contact them to ask for a refund, perhaps it got lost in the post.

10. Sundry Income. Sundry income from Ebay or auction sales for example is not taxable if you are just having a one off sale but is taxable if you are running a business or getting regular income.

see also: Improve credit rating

UK Tax

Banks Overcharging for information on exit fees

Banks who overcharged customers for things like exit fees and other late payment fees have now been accused of overcharging customers who want information about their overcharging. Customers are entitled to ask the bank for a list of all charges. The Data Protection Act stipulates the cost should be £10, but many banks are charging upto £48.

The Financial Ombudsman Service is being overwhelmed by complaints from customers who claim banks are taking too long to respond.

THe banks are being investigaged by several different bodies.

The Office of Fair Trading OFT is investigating a fair level of bank charges.

The Financial Services Authority is investigating the slow response time of banks to customer requests

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

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

12 Month Interest Free Barclay Credit Card

I am always looking for good credit card deals to switch my balance over. If you are paying a standard credit card rate of 15% or more, you should definitely looking into switching it to a lower credit card deal.

Barclays have a credit card deal that offers 12 months interest free on balance transfers. This is a very good deal because it saves the hassle of changing every 6 months. There is a 2.5% handling fee, but that is quite low. It is effectively the same as borrowing a certain amount for an annual interest rate of 2.5% which is slightly less than the UK rate of inflation at 2.7%

Barclays

Single Mother gets Money Back from Bank

A single mother has personally reclaimed more that £23,000 in bank charges for herself and her friends despite having no financial or legal training.

She received back over £500 for penalty charges made by her bank, the Halifax. She threatened to take them to court unless they would pay the money back. After getting the money back she took on the cases of friends and families in the past couple of years she has neted an amazing £23,000 from banks from false charges.

news story

Just shows always worth complaining...

More tips on saving money from the banks

Top 10 Financial Tips for saving Money

1. Avoid Late Payment Penalties. Don’t be hit by penalties for late payment. Make sure you always pay off at least the minimum on your credit cards. A good tip is to set up a direct debit so that your payment can never get delayed in the post.

2. Arrange Overdrafts First. If you are going to go overdrawn try to arrange an official overdraft or take out an emergency loan. This will save a lot of money in penalty charges. Also it will protect your credit rating.

3. Don’t accept penalty payments. If you do miss a payment by mistake or go slightly overdrawn then the bank might agree to give you the benefit of the doubt. If you have been charged; the first thing to do is to write to the bank or phone and explain there was an unfortunate mix-up, due to getting lost in the post (or some other excuse) the payment was unfortunately late. Quite often the banks will agree to retract the penalty charge and not harm your credit rating. The important thing is that it is always worth trying, banks do actually want to create a good brand image, (even if it might not seem like it all the time)

4. Move Credit Cards to 0% interest. If you have a credit card debt, the standard rate will probably be over 15%. However many credit card companies offer 0% balance transfers for the first 6 or 9 months. This is definitely worth doing. When the 6-month period ends, just move it to another credit card company. Some credit card companies may have a 2% balance transfer charge. However this would still work out at an average annual interest payment of 3% (on a 9 month balance transfer) so is definitely better than staying at 17%.

5. Move Debt to Lowest interest Rate. If you are unable to do the above, at least move your debt to the lowest paying interest account. If you are paying interest on a credit card at over 15% there is probably a much cheaper way of borrowing money. Take out a personal loan, which may be half the cost. If you are a homeowner, consider Remortgaging or taking out a loan secured against the value of the house.

6. Try to limit your debt. Look for manageable ways to reduce unnecessary outgoings. Try to budget your spending so that you don’t spend excessively. It is quite easy to underestimate how much you spend on going out, buying clothes e.t.c. It is worth keeping track of knowing how much you spend. Often when people realise how much they spend on takeaways, clothes e.t.c it is quite a shock and they wish to reduce their spending. Don’t live in denial about your high spending habits.

7. Find Best Deals. Take time to search for the best deal. For things like utility bills you can probably save significant amounts of money by switching to a cheaper deal. Use the Internet to find the best deals available online.

8. Small savings add up. If you pay your bills by direct debit, usually you get a small discount. Also some firms encourage you to switch to paperless bills, e.g. BT give a small saving (25p) for doing this. All these small savings combined can make a big difference.

9. Avoid Impluse Buying. Before buying something ask yourself “Do I really need this”. If you find your shopping can easily get out of hand. Try to ask yourself “how often will I use this?” If you can sincerely say that you will use it / wear it often then it will be a good purchase. However if you already have 88 pair of shoes, you have to be honest with yourself and say maybe the 89th pair isn’t of the highest priority.

11. Don’t have kids… children will cost you an average of £200,000 each during their stay at home, not to mention the endless taxi services. Of course non-economists may say finance isn’t the only important thing in life…

All these things can help you save money, reducing your financial stress and allowing you to enjoy the things that really matter.

Reducing Burden of Mortgage interest Payments

For most people in the UK mortgage payments represent the biggest section of their disposable income. With rising UK house prices, to get on the property ladder, often involves borrowing as much as the banks are willing. However with the recent rise in base rates homeowners are starting to feel the pinch of mortgage payments more than ever. If you are a homeowner struggling to meet your monthly mortgage payments there are various things that you can consider.

1. Take stock of your financial situation. Look at all your incoming income and outgoing expenditure. Also list all the various debt that you have.

2. Reduce other Expenditures. Look at your monthly outgoings and see what is essential and what could be reduced. For example switching to online payment of electric and gas suppliers can often save money. Maybe you can do without the Sky subscription for awhile.

3. Consider remortgaging. This is probably the most significant way of saving money, especially if you are on your building societies standard variable Rate. There are many mortgage deals which are likely to give you a better deal and reduce your interest payments.

4. 40 or 50 year Mortgages. Many people dislike the idea of having a mortgage for 50 years. They worry whether they will be able to pay when they are retired. Also overall interest payments will be higher. However it is worth remembering that over time a mortgage payment becomes more manageable to pay, because it doesn’t rise with inflation. If you ask someone who has been paying a mortgage for 20 years you would be surprised at how little their monthly payments are. At the end of the day it is better to get a 50 year mortgage than have the house repossess and to end up paying rent (which will rise in line with inflation or more)

5. Interest Only Mortgages. Consider switching to interest only payments. This will reduce your monthly mortgage payments however it is high risk because it assumes you are able to save enough capital through an alternative investment scheme. To pay off the capital debt in the future.

Avoiding High Credit Card debt Payments

Research by Money Supermarket suggests a missed credit card payment could cost upto £300.

It is increasingly popular for consumer to switch their credit card debt between different companies. This is something known as "Rate Tart" - always moving your debt to lowest interest payment. However if you miss a payment you could be automatically moved from the 0% introductory offer to the standard AVR, which could be upto 17%. ALso you may be charged a penalty for a missed payment. In order to avoid this it is best to set up a direct debit to pay minimum off each month and also try to pay some extra each month.

Counsel for Personal Debt Finance

"I have a personal view that money is hard to earn and easy to spend. So what if that philosophy makes me a bit of a skin flint, tight wad or even miser in some peoples eyes, I do look after my brass."

Today we have a guest blogger sharing some hard won advice about saving a few pennies. Sounds like Emma was brought up in Yorkshire. "Where there's muck there's brass"...

Anyway, always worth taking time to make sure you aren't paying too much interest.

View: Counsel for personal debt finance