'How terrible is debt?'
September 21, 2007 at 3:15 pm
Sadly, debt has become an accepted feature of life for most of the UK’s population. Indeed, it may be shocking to note that debt in the UK has now surpassed the sum of one trillion pounds. In such circumstances, it is interesting then to speculate whether debt has become a serious crisis for Britain that we should all be worrying about, or whether the media has simply blown the issue out of proportion with pointless scaremongering. A number of researchers have recently argued that debt in Britain is more a sign of financial security rather than insecurity, and is in fact nothing to worry about.
According to maths experts Michael Blastland and Andrew Dilnot, whilst British people on the whole owe a lot of money, they actually own a lot as well. Most debt is minimal compared to how much wealth people have and it is likely not to be damaging in the least. It may seem ironic but often the reasons for debt are strategic: many are in debt because they are trying to ‘’build’’ money rather than lose it. Admittedly, there are some people who are genuinely in trouble but these are a minority amongst all those who owe money and yet are financially stable by anyone’s standards.
It is important to remember a few things about debt. First of all, due to economic growth and inflation, the number of pounds in circulation double every 15 years: it is therefore true that if there are more pounds around, there are ipso facto more pounds owed as well. Secondly, statistics rarely deal with the holdings of those in debt. For example, British people own more housing than anywhere in Europe. So, even if we owe lots on our mortgages, this property ownership and our overall quality of life makes us the final winners.
Though there are people who are still in trouble due to debt, it is still worth putting it all in perspective by considering that debt isn’t intrinsically a bad thing. What is most important is not necessarily to avoid debt altogether (as it could indeed be beneficial in many cases) but to be conscious of it and stay in control. As long as this is managed and you have some kind of plan for how to manage your debt, the concept no longer needs to be feared.
'Credit card companies introduce even more charges'
September 17, 2007 at 2:20 pm
There has been a worrying new trend over the past year in which credit card companies are introducing new charges to make even more money. As consumers’ association Which? has found, these “ingenious methods” for getting more out of consumers are due to a decision made by the Office of Fair Trading (OFT) to cut standard credit card fees from over £20 to just £12. Indeed, it seems that many credit card companies are managing to compensate for this loss using subtle additions to their fees.
The types of new methods used are numerous. For example in May, the UK’s biggest credit card issuer Barclaycard announced new fees up to £20 a year for low-usage, shortly followed by Lloyds TSB who similarly announced that they, too, would soon have a £35 a year charge for those who did not use their credit card enough.
Not only have there been new charges introduced for low use but many companies have raised interest rates for cash withdrawal and changed regulations for card use abroad. Some banks such as The Royal Bank of Scotland now charge cardholders a £12 fee if they move home without informing the bank – and only gives them two months in which to do so. Furthermore, some companies have even considered annual fees just for owning a card.
These charges will obviously affect millions of customers who are left with no choice but to pay them if they want to continue to use their credit cards. It is, however, a serious concern for many, that companies can charge, using any excuse.
Take the low use charge for example. None of the aforementioned banks have given a strict definition of what counts as low-use, and it basically takes those people out of the picture who have a credit card just for emergencies. Also, given this new trend to introduce more obscure charges, what’s next in the line-up, we ask: a fee for mistyping your pin? A fee for card replacement should you lose it? In many cases, the charges may be small but it does make one wonder about the inevitable build-up that will result from them at our expense.
The banking industry insist that what they have done is a fair result of the decision made by OFT which would have otherwise resulted in banks losing a collective £60m each year. As Sandra Qunn of the UK payments association Apacs assures us, there has been no sneaky practice of charging consumers without their knowledge. In fact, every new charge has been upfront, with every statement now listing all the key information about charging.
However, this will probably do little to satisfy those thousands of customers who have been landed with fees that look like nothing more than rip-off strategies to reclaim lost revenue. Given that there are over 75 million credit cards in the UK, with many of us having more than one, it will be necessary to make sure you know the rules for each one so you don’t get charged unaware.
'Do you need a premium credit card?'
September 5, 2007 at 10:21 am
No longer confined to the hands of affluent city businessmen and wealthy heiresses, premium credit cards have become all the rage in recent years. Undoubtedly, the associated ‘snob-factor’ has proved hard to resist for many. But are there any real advantages in having a premium credit card and, more importantly, should you invest in one? Here’s a rough guide to the world of premium credit cards.
Most people are put off premium credit cards because they believe that they would be unable to afford the costs involved. However, surveys suggest that these credit cards generally come with lower APRs.
For the most part, premium credit card holders must deal with interest rates of around 14% or 15% compared to the standard 18-19% faced by other card-holders. As such, low interest rates make these cards an excellent option for just about anyone who wants to save on interest payments.
Low interest rates on premium credit cards might come as a surprise, but providers have had little choice given the current state of the premium credit card market in the United Kingdom. With few takers beyond the rich and famous, financial institutions are now seeking to attract less affluent Britons. It is therefore hardly surprising that most providers of premium credit cards require that you have an annual income of a mere £13,000 per annum.
There are further benefits to be gained as well. However, in general, these are only available to those card-holders who pay off their balance in full each month. For example, it’s perfectly possible to get a credit limit of a few thousand pounds if you pay off your entire balance at the end of each month. If you fail to do so, however, your credit limit is likely to be significantly lower. Other advantages include free travel insurance and cash back offers.
Critics, however, argue that you shouldn’t let such benefits sway you to switch to a premium credit card. After all, you’ll only receive additional benefits if you continually pay for purchases using your premium credit card. According to Kathy Foley of The Times, “Real perks only come with the credit cards aimed at those individuals who don’t need credit cards.”
The most exclusive of premium credit cards are available only to a lucky few. These include the American Express ‘Black Centurion’ credit card which is on offer only to a few select clients chosen by the company. Another example is the Signia Mastercard issued by the Queen’s bankers, Coutts and Co. If you’re lucky enough to possess either of these cards you can enjoy perks from worldwide concierge services to the use of luxury airport lounges.
So think carefully before switching to a premium credit card. Whilst there are benefits to be reaped, much depends on your current financial situation and the extent to which you value perks and freebies.
'Identity theft abroad'
August 30, 2007 at 9:41 am
Identity theft is recognised as a serious threat by the vast majority of people. However, although we are more vulnerable when abroad, that is the very time that we drop our guard. According to research carried out in 2005 by the UK’s Fraud Prevention Service, it takes an average of 201 hours to unravel the damage done by identity thieves. Add to that the stress and inconvenience when it happens and you will see that it is well worth taking a few simple precautions.
As an example of the risks we consciously or unconsciously take, Capital One discovered that approximately 45% of us do not bother using the hotel safe. Instead, we leave our passport and personal documents lying around, oblivious to the fact that not all hotel staff are scrupulously honest. Alternatively, many carry them around, leaving themselves vulnerable to pickpockets.
The risks are real and palpable. Last year, almost 300,000 of us lost or had our passport stolen abroad. Indeed, many criminals would much prefer our personal details to our cash or other personal belongings. After all, with someone’s personal details, they can apply for credit cards, take out mobile phone contracts and operate our bank account, to say nothing of the various illegal activities which could be carried out in our name – all while we are sunning ourselves in blissful ignorance.
The places with the highest risk of identity theft are:
- America
- Africa (especially Nigeria)
- Eastern Europe
- Malaysia
- Indonesia
As well as the obvious security measure of travellers’ cheques instead of credit cards, other tips to avoid falling prey to identity theft include:
- Notifying your bank if you are spending any significant time abroad.
- Having your post looked after by a neighbour or using the Royal Mail Keepsafe service.
- Using the hotel safe even if there is a charge – it is money well spent, after all.
- Using a money belt or concealed pouch if you have to carry your documents with you – for instance, when travelling.
- Keeping an eye on your credit card at all times.
- Not leaving important documents on the car seat beside you and keeping the car locked at all times and windows closed.
- Being aware of people asking to see your passport in the street – there are many scams in various parts of the world and many people are fooled.
- Using your business address and phone number when checking into hotels.
- Checking your credit card and bank statements carefully on your return home and acting immediately if there are any suspicious transactions.
If the worst comes to the worst and your passport is stolen, report it to the police and contact the British Embassy to make arrangements for an emergency replacement to be obtained. This will be easier if you have a copy of your passport with you (kept separate from the original of course) or one left at home with a friend.
'Snowball your way out of debt'
August 10, 2007 at 9:43 am
Debt advice is everywhere: “helpful” consolidators for debt management, government-funded financial support, independent advice centres; there seems to be no shortage of people telling you what to do, whether you’re paying off your credit card each month with little problem, or dealing with debts comparable to your average Third World country.
However, for those of us who fall between these two camps, and are trying to pay off large sums in the most economic way possible, there’s a great online tool, curioustly titled the Snowball. This clever little calculator on whatsthecost.com, a website set up to help consumers wrest back control of their finances with free money management tools, helps debtors prioritise and track their debts as they, hopefully, dwindle.
The concept of snowballing debt is fairly simple – target the card (or loan) which is costing you most, and focus on repaying that first. Once that debt is cleared, you can move on to the next most expensive debt, and so on. As an example, let’s say you have £2,000 outstanding on a credit card charging 14.9% APR and a further £3,500 for which you are being charged 6.9%. With £400 per month to put towards the debt, you could simply split the money between the two cards. At this rate, it would take you 11 months to pay off the first debt, and a further four months to clear the second debt. You would pay a total of around £285 in interest. By snowballing the debt, you would still need 15 months to make the full repayments, but would save yourself £35 in interest charges. With a fairly simple example like this, the best course of action is fairly obvious. The more debts and interest rates involved, the more you will be grateful for the snowball calculator!
Another thing which makes a simple snowball a headache in practice is the fact that most lenders will require a minimum monthly repayment, whether that’s a fixed sum or a percentage of the outstanding debt. Introductory interest-free periods and subsequent rate hikes all complicate the issue. This is where the snowball comes in handy. You enter all your debt details (the snowball can handle up to 20 debts), including the balance, rate, minimum repayment and other conditions, as well as the sum of money you have available each month for debt repayment. A click of the mouse then brings up your personal repayment plan, showing you which debt to target first and how long it will take until you are debt free. You can play around with the figures, as increasing the monthly repayments can have a dramatic effect on the speed with which you can clear your debt, not to mention the interest you will save.
Consumers with several debtors may be drawn to debt consolidation – one lump sum and a single monthly repayment can seem a simpler, more affordable solution. Use the snowball to calculate how much you would end up paying in the long run, however, and you may get a nasty shock. Affordability and improved cash flow in the short term come at a price. In the end, the most effective way to tackle credit card debt is not to put off the evil day of repayment, but to manage the debt more effectively over a period.
The snowball helps you achieve the first three steps which the Citizens’ Advice Bureau suggests for those needing to tackle debt:
- Step One – make a list of your debts
- Step Two – work out your budget
- Step Three – sort out your priority debts
Start the snowball rolling now and, in conjunction with responsible spending and realistic budgeting, you might find yourself debt free sooner than you thought.
'Use your credit card and save
August 1, 2007 at 3:48 am
Price comparison website, Moneysupermarket.com, has calculated that an average household could make £270 by performing a simple, and entirely legitimate, credit card trick.
Many credit card providers, who are voraciously competing with each other for market share, are offering 0 per cent interest on balance transfers and purchases, often for a period of up to 12 months.
The trick involves using the cards for spending on everyday items such as food, petrol, clothes and recreation. The consumer website has estimated that the average household spends £1,930 a month on these expenses. If you were to use a 0 per cent credit card to pay these bills, and put the money you would normally spend in a competitive savings account, you could make an extra bit of cash out of your bank!
The figure of £270 is arrived at by investing the usual maximum credit limit of £6000 (or £1930 over a three month period) into a high interest bank account yielding 6 per cent. After 12 months, the customer can withdraw the £6000 to pay off their credit card bill (having accrued no interest on the amount) and pocket the interest that the cash has earned sitting in a savings account. Many current accounts are paying high interest rates on amounts up to £2500). (see www.banking-guide.org.uk for more information).
This trick is only worth contemplating if, like two thirds of people, you can pay your credit bills regularly at the end of the month. The benefits of this scheme would be completely negated if you were caught out and started paying interest on the £6000 because you were unable to pay the amount off after 12 months.
You could extend the duration of this profitable consumer enterprise by changing your credit card provider after the 12 month interest fee period has elapsed, and repeating the procedure elsewhere. However, many of the major underlying operators, such as MBNA, don’t allow this type of transfer.
Consumers should constantly be on the look out for ways to get the best value out of banks’ willingness to compete. Rob Kenley, head of credit cards at Moneysupermarket.com commented: “Using a credit card with a 0% purchase offer and investing the equivalent amount of money in a savings or current account is an extreme case of banks paying us for our business”.
There are currently 8 different credit cards which offer 0 per cent interest on purchases (before applying for them be sure to check the other particulars like typical APR, balance transfer rate and how long they are offering the 0 per cent on purchases):
'What you should know when changing your credit card provider'
July 18, 2007 at 4:32 pm
These days it would appear as though just about every organization, from your trusted local bank to your favourite department store, provides their customers with some new sort of credit service. Navigating between the varied credit card services available is difficult at the best of times. However, changing your credit card provider can often be a rather confusing process. So what should you be aware of when moving between different credit card providers? There are a number of key facts and issues that one should always bear in mind when taking this important decision.
People often choose to change their credit card provider in order to manage debt. If you find yourself unable to deal with your current credit debt, switching to a different provider will allow you to take advantage of the extremely low interest rates offered by many card companies on debt transfer. Indeed, many providers offer other exclusive deals to new customers as well, such as air miles, cashback agreements and free insurance services. But, caution is the key! Providers will often stipulate that transferred debt must be paid off over a certain period of time – for example six months. If you fail to pay off your card debt by the end of this period, interest rates will revert to their original (often very high) level and the initial savings gained by switching provider will soon be exceeded by the costs of high interest payments.
The best way of dealing with debt is by making sure that you are not in debt – repay as much of the outstanding balance on your new card as possible each month. Staying alert is particularly important if your reason for switching provider was debt-related in the first place. Be wary of store cards. These days, almost every high street chain offers their own store card – as a rule of thumb you will invariably end up paying more for your purchases in the long-run if you choose to use these cards.
The final factor you need to consider when changing your credit card provider is your credit rating. Your credit rating is determined by levels of outstanding debt and as such might be adversely affected if you continually take out new credit cards. Lenders may be unwilling to issue you with additional credit cards if they believe that you have too much outstanding credit and as such are likely to default on debt repayment. For further help with debt-related issues, click here.
So, next time you choose to change your credit provider, bear a few facts in mind. Remember that preferential interest rates will only be in effect for a short period. Banks should, however, provide you with some warning before interest rates revert to their normal level. Keep your credit card debt as low as possible and be vigilant when taking out new cards. Finally, be warned that taking out too many credit cards could adversely affect your credit rating. Happy shopping!
'UK celebrates 20 years of debit cards'
July 18, 2007 at 4:09 pm
This June marks 20 years since Barclays first introduced the debit card to British consumers back in 1987, and to celebrate the significant milestone, payment trade association Apacs has compiled a list of statistics relating to the plastic card.
When the debit card was first introduced in the UK, it heralded a significant shift in the way consumers made transactions. Thanks to the debit card, many people cannot remember the last time they had to write a cheque and some retailers no longer even accept them as a valid form of payment.
Beyond paying for goods in shops, restaurants and supermarkets, debit cards also brought about the advent of automated teller machine (ATM) ‘hole in the wall’ cash withdrawals, not to mention heralding in the cash-back system, and helping the once nascent e-commerce sector become what it is today.
Apacs has calculated that there are now over 41 million debit card holders in the UK, 84 per cent of the entire adult population. In 1987, only 34 per cent of UK adults had any plastic in their wallets, and most of this consisted of credit cards. There are 68 million debit cards in circulation today, compared with just 19 million in 1990, three years after their launch.
In 2006 alone, Brits made 4.5 billion purchases on their debit cards (143 every second), spending a grand total of £194.9 billion, five times the amount spent just ten years earlier. Last year, each person with a debit card used it 166 times on average, making £4,799 worth of purchases and withdrawing £3,848 in cash.
Jenna Smith, head of PR at Apacs, commented on the 20th anniversary celebrations: “It’s hard now for most of us to remember what life was like before the debit card, as it’s become one of those things we’re unlikely to leave home without. Before 1987, most of us were totally reliant on cash or cheques, and although credit cards were used in supermarkets at that time, they only made up six per cent of transactions.
“Today, cards amount for 66 per cent of supermarket spending, and most of this is on debit cards,” she continued. “In fact, over a third of all debit card transactions are made at the checkout.”
Bright future
Apacs goes on to estimate that spending on debit cards will double by 2016, to over £400 billion, due in part to the introduction of ‘contactless’ payments technology, which could remove much of the need for consumers to carry small change. Analysts are already predicting advancements as ‘sci-fi’ as voice recognition in the debit card’s future.
With more credit cards introducing annual fees, experts are expecting the practice to once again become ‘the norm’ within three years; financial research company Defaqto has gone as far as to suggest that debit cards could be boosted by a mass exodus of casual credit card users, stung by fees.
Commenting on the growing number of credit card providers implementing fees, David Black, head of banking at Defaqto, predicted: “This will herald a significant contraction in the market size as people who clear their outstanding credit card balances on a monthly basis will, as they start facing annual fees, jettison credit cards in favour of using debit cards instead.”
'One in five consumers unhappy with their current credit card'
July 18, 2007 at 3:19 pm
A report by the price comparison website uSwitch has revealed that 20% of consumers (some seven million users) are currently dissatisfied with their credit card provider. The uSwitch survey examined customer satisfaction across a variety of different categories, ranging from payment and application services to value for money. Despite general dissatisfaction however, card-holders were often unwilling to change their card provider. Given the growing popularity of credit cards in the United Kingdom, this appears a rather worrying development.
In terms of satisfaction and performance, Nationwide was ranked the best provider – only 6% of customers reported problems with their card provider. According to Mike Naylor, Personal Financial Expert at uSwitch, Nationwide’s success can be credited to “…their unusually preferential order of repayments and the lack of exchange rate loading fees on its credit card overseas.” American Express and Morgan Stanley also fared well in the uSwitch poll. Capital One which currently has 6% of the market share in the UK received the worst rating amongst card providers with 32% of card-holders – a whopping 1.9 million individuals – reporting dissatisfaction.
There are a number of important reasons behind card-holders’ frustration. Part of the blame can be attributed to high annual interest rates and poor customer services. Some card holders, however, have little choice when it comes to the matter. Consumers with poor credit ratings often find themselves unable to switch to a different card provider.
However, the majority of unhappy card-holders are unlikely to take any action against their card provider. Surveys suggest that card-holders are likely to stay with the same card provider for an average of six years regardless of whether or not they are content with the services provided. As a consequence high street credit card providers still dominate the market, holding two-thirds of market share and serving 21.5 million customers across the country. Card-holder indifference can be attributed to a number of factors. These range from loyalty to the card provider (this was the case for 31% of customers) to general consumer apathy. Over half of consumers never compare their existing deal with other similar deals available on the market. As such card providers are able to rely on ‘customer lethargy’ to maintain their profits and have no incentive to improve the quality of the services offered.
These days switching credit card provider can be a quick process. There are also many savings to be taken advantage of if you choose to transfer to another card provider. For example you could save over £2000 in interest on a 13.0% balance transfer deal similar to those offered by banks such as NatWest and the Royal Bank of Scotland. Given the wealth of information available through price comparison websites and other media, finding the best credit card deal is no longer difficult. Price comparison guides, such as the magazine, Which? are a good starting point. Be sure to shop around for the best possible deal, as doing so could save you a great deal of money.
'What does my credit rating mean?'
July 18, 2007 at 4:16 am
An individual’s credit rating determines their level of credit worthiness – simply put, how willing lenders are to supply you with credit. Your credit rating is part of your general financial health; a good online method of assessing your overall financial health may be found here. Credit ratings are calculated based on a number of criteria, from financial histories and saving patterns to existing liabilities. Lenders believe that such information will provide them with a good idea of the likelihood of a borrower defaulting on their existing loans. The lower your credit rating, the more likely you are to be denied a loan. Furthermore, in the event that lenders agree to provide you with credit, the interest rates they demand on loans will be higher for borrowers with poor credit ratings.
In the United Kingdom, credit ratings are largely determined by two organizations: Experian and Equifax. They gather information on borrowers from a wide variety of sources ranging from county court judgments and house repossessions to degrees of personal indebtedness. Every credit transaction you undertake leaves behind an ‘electronic footprint’ and these footprints are closely monitored by the aforementioned agencies.
Based on the information provided by these organizations and their own findings, suppliers of credit may choose to deny you borrowing privileges. However, if you believe that you have been denied credit unfairly, it may be possible to contact the relevant agency and lodge a complaint. You will be required to pay a charge for this service, generally around £2. If your credit rating was miscalculated (because the resulting score was generated by a computer program) or if it was based on the financial records of individuals unconnected with yourself, then it should be possible to question the lender’s decision to deny you credit. However, it is not possible to remove any accurate information regarding your credit history from your file, no matter how unpleasant it may be.
What happens if a lender refuses to overturn their decision to deny you credit? The only real solution in this case is to improve your credit rating. The main reason behind a poor credit rating is a high level of personal debt. Remedying your credit rating therefore involves dealing with your debt issues and managing your spending effectively. Be warned, however, that whilst many firms claim to be able to raise your credit rating, this is by no means a foolproof solution. Indeed, a number of such organisations have been responsible for hoodwinking unsuspecting customers and scams are commonplace. Further advice on dealing with your credit score may be obtained from the Information Commission (Telephone: 01625 545 745 (Data Protection Helpline); 01625 545 700 (general)) which provides impartial advice and assistance to borrowers.
