Credit Card Debt, Who Can Help?
Credit cards are a valuable and easy to use source for short term credit. They also provide valuable backup warranty and liability protection when buying goods or services in excess of £100.
However, they are designed as short term credit products and the principle feature is that they allow a rolling debt position to accumulate if the outstanding balance is not repaid when due at the end of the month. The usual requirement is for a nominal 5% or £5 to be repaid to 'stay in contact' with the lender. Any balance not paid will immediately be charged interest (back from the date of the transaction) of up to 30% APR. Average card rates are currently 18% and with bank base rates at less than 1%, this is can be a very expensive form of borrowing.
Of course, credit card companies depend on a high proportion of customers not paying off the monthly balance as it falls due. Their three sources of income are card renewal fees (where charged to the customer annually), merchants' fees (an amount paid by the shop or retailer to cover the processing cost of the transaction and interest charges on card balances). Of all these, interest charge spreads are the highest earner.
Credit cards provide quick and easy credit. There has been tremendous competition between lenders and there are a number of attractive sounding balance transfer and lower rate deals on offer. However, this requires active management on behalf of the customer and a close scrutiny of the terms and conditions since usually only the balance transferred can be free but new transactions charged at the 'normal' rate.
Fundamentally, credit cards are not designed for long term, hard core borrowing. Whilst it is possible to juggle card balances and get short term relief, the proper answer is to look for ways of clearing the debt completely onto more sensible products that match your family budget.
If you have hard core borrowings on one or more credit or store card you should look to consolidate the balances into a single, fixed rate loan with a reputable provider. Take a look at your monthly family budget and work out what you can sensibly afford to pay and then match the term of the loan to this amount. Applying for a loan is straightforward and can be done on the internet or through a broker. Make sure that you look around and get plenty of quotes since there are many offers available so getting the right one for you may take some time.
By moving to a fixed rate loan you should be able to save a considerable amount of interest charges and get your debt under control. Once you have paid off your credit or store cards, you should put in place a plan that stops you building up large balances again otherwise you will be back to square one.
There are a number of debt management plans that can be discussed with a broker or provider. However, free and impartial advice on debt management – and credit card debt particularly – can be obtained from the Citizens Advice Bureau.
If you already have a number of loans and the credit card(s) have provided extra working cash, then you probably have a serious debt issue that needs more proactive action. A debt management plan, where you talk to all your lenders and try to agree a moratorium or reduced payment plan, may help. But this is voluntary and requires your lenders to agree. They may change their minds at any time and revert to the original terms.
A more robust and legally enforceable debt management plan is an Individual Voluntary Agreement (IVA). Here, provided 75% of your lenders (by value of debt) agree, you could find yourself making reduced payments and having the outstanding balance written off within five years. Getting your lenders to agree to such a plan is not easy and you may find the assistance of a specialist debt management company a help in fronting the negotiations and managing your subsequent plan. IVA's will affect your credit rating and you may find it more difficult to raise credit in the future but they can be an effective way of getting yourself back on your feet with a clean sheet after a few years.
If you really have run out of options and your lenders will not agree to an IVA or see that you have insufficient means to repay what they agree, then the final solution is bankruptcy. This is not a state that should be considered lightly and you should get advice from a lawyer or registered insolvency practitioner.