Gregory Pennington - debt management company

Managing your own debt – what if a creditor refuses an offer?

Debt management companies like Gregory Pennington offer to help people out of their financial troubles by managing their debt for them. In other words, they’ll handle the paperwork and distribute funds among their unsecured creditors, as well as providing advice. They’ll also talk to their creditors on their behalf, asking them to accept lower payments, freeze interest and / or waive charges: for many people, this is the best thing about a debt management plan.

Do It Yourself debt management
However, a debt management plan isn’t for everyone. Some people are quite happy to manage their own debts – and negotiate with their own creditors. In many cases, it works well: they figure out their income and expenditure, draw up a repayment plan, discuss their financial problems with each creditor and agree to an affordable way of repaying what they owe.

But it doesn’t always work out. Lenders don’t have to agree to lower payments, whoever asks them to (they might be more likely to agree if they’re asked by a representative of a professional debt management company, but they might not).

The question is this: what do you do if you make an offer and the lender rejects it?

The most important thing to do is prove that you’re trying your best to pay back what you owe – that you’d like to stick to the original repayment agreement, but your circumstances have changed and you simply can’t afford it anymore.

Write a letter
So write to them again, explaining why you can’t keep up with your payments. Describe how your situation has changed. Include a budget that shows how much you earn and where that money goes, so they can see you’re paying as much as you can.

It’s important to tell them if you owe money to other lenders, and if they’ve agreed to accept lower payments (include copies of their letters, if possible). It’s also important to explain that you couldn’t pay more without reducing your payments to these other lenders – and that you’ve already promised them you’d treat all your unsecured creditors equally.

Finally (even though they’ve already turned down your offer of reduced payments), tell your creditor you’ll start making the payments straight away as a ‘goodwill gesture’. This will show them that you’re serious about repaying the debt – and if the case ever ends up in court, it’ll also show the judge that you’re doing your best.

Remember: whenever your creditor agrees to something, ask them to confirm it in writing. Make sure you hang on to all the letters they send you – and keep copies of anything you send them.

Do you need help managing your debts?
Dealing with debt isn’t easy. If you find you’re spending time and money on phone calls and letters to creditors and still not getting anywhere, it might be worth calling in the experts.

To find out how Gregory Pennington can help you manage your debts, just click here or speak to an expert debt adviser on freephone 0800 161 3516.

Managing debt in a slowing economy

Managing debt is never easy, but it tends to get harder when the economy slows down. House prices, interest rates, inflation, unemployment – all these national factors (and many more) have a very real impact on our own day-to-day finances.

June’s report from the OECD* says that the world’s economies, and the UK’s, will take longer than expected to recover from shocks like oil prices and the credit crunch. It’s bad news for everyone, as a slower economy means people have less disposable cash.

But it’s particularly worrying for people whose finances are already stretched to the limit. If their entire income is already taken up managing their debts and paying for basic living expenses, how will they cope when their income goes down, their expenses go up – or both?

What’s ahead for the UK?
The credit crunch and the problems in the housing market are both slowing the economy down. The OECD thinks the nation’s GDP (Gross Domestic Product – the total value of goods and services produced) will grow by just 1.8% this year, and only 1.4% in 2009 (last year, the figure was 3%).

At the same time, the CPI (Consumer Price Index – the prices we pay for goods and services) is expected to grow by more than 3.5% later this year. That’s much higher than the government’s 2% target, so prices are rising more quickly than they should.

That high inflation means the Bank of England isn’t likely to cut its base rate, as lower interest rates mean money becomes cheaper, which adds to inflation. So lenders aren’t likely to cut their interest rates (which would make debts more manageable).

Finally, the OECD thinks unemployment will rise, from 5.4% last year to 5.5% this year and 5.8% in 2009.

What can a borrower do?
So economic growth is slowing down; prices are going up; the cost of debt (probably) won’t come down; and more people are going to be unemployed.

When household budgets get squeezed, every penny becomes more important. Any borrower struggling to keep up might find it a lot easier if they could just make their debt repayments more manageable – with a professional debt solution, perhaps.

They could, for example, take out a debt consolidation loan or mortgage. By arranging to pay it back slowly, they could reduce the amount of each monthly payment (although this would mean the debt takes longer to clear).

They might, if their debts are substantial, consider an IVA (Individual Voluntary Arrangement), a formal agreement with their unsecured creditors. They’d agree to pay a fixed monthly amount that’ll leave them with enough for their mortgage / rent and other essential living expenses. After (normally) 5 years, their outstanding unsecured debt would be written off.

Or they might join a debt management plan – asking a debt management specialist to ask their unsecured creditors to accept lower payments, freeze interest and / or waive charges. Every debt management company is different, but some will handle everything from answering phone calls and letters to renegotiating payment terms and distributing funds.

*The Organisation for Economic Co-operation and Development publishes its Economic Outlook twice a year.

Interest rates, inflation – and managing debt

If people need help managing their debts, why doesn’t the Bank of England (BoE) just slash its base rate? After all, the base rate is what helps financial companies decide how much they’ll charge borrowers and pay savers. So in general, a lower base rate means less profitable savings – but less expensive debts.

Since the credit crunch started, the USA’s Federal Reserve has dropped its rate from 5.25% to 2%, hoping to help people manage their debts (from credit card bills to mortgages) by reducing the interest they pay on them. In the UK, however, the BoE has only lowered its base rate from 5.75% to 5%. Why?

Interest rates and their impact on inflation
Borrowers and savers aren’t the only ones affected by changes to the base rate. Even someone with no debts and no savings will still feel the effects that rising and falling interest rates have on inflation (the speed at which prices grow).

When interest rates are low
Money is cheaper. Saving is less profitable – but borrowing is less expensive, so debts are easier to manage. People are more likely to borrow and less likely to save. Plus, low interest rates can boost the value of assets (like houses and shares), which also means people have more money to spend. But when spending grows too fast, this can lead to high inflation, which can damage the economy – goods and services can become too expensive, and the pound becomes worth less (not just in people’s pockets, but in international financial markets).

When interest rates are high
Money is more expensive, so people are more likely to save and less likely to borrow, keeping inflation low. This is good for the nation’s long-term economic growth, but when inflation is too low, it can mean salaries grow more slowly. Plus, when interest rates are too high, people and companies can’t afford to borrow for essential things – like buying a house or growing a business.

What’s next for interest rates?
It’s hard to say. The BoE can’t just slash interest rates. It has to do a ‘balancing act’, keeping interest rates low enough to allow healthy, sensible borrowing – and help people manage their existing debts – but high enough to keep inflation under control. It’s a difficult job, not just because there’s a lot of pressure to cut rates dramatically (like the USA’s Federal Reserve did) to make people’s debts more manageable, but because any change to the base rate can take years to have their full impact on inflation, which makes it very hard to measure the effect of previous changes.

Debt Management: when bankruptcy isn`t the answer...

Debt management plans are almost certainly keeping thousands of borrowers from going bankrupt. As figures from the Insolvency Service reveal, there were over 25,000 insolvencies in the first three months of 2008 – and according to R3, the Association of Business Recovery Professionals, that figure tells only part of the story.

A recent press release from R3 states that: ‘The true number of individuals unable to pay their debts in the UK could be three times higher than the Insolvency Service’s figures due to those in Debt Management Plans not being counted.’

Debt management halts the ‘debt spiral’
For thousands, a debt management plan is the ideal way to break free of a downward spiral into debt before it reaches the point where insolvency is the only option. If someone’s monthly debt repayments become unaffordable, most creditors will be prepared to negotiate. They may, for instance, accept lower payments, waive charges, freeze interest or grant a short ‘payment holiday’ (a period of time when the borrower has to pay nothing).

But that doesn’t mean it’s easy. Negotiations can be complex, and each creditor’s response will depend on various factors, including how many other debts the borrower has, as well as how well they’ve paid their bills in the past and why they’re in financial difficulties now. Rather than ‘going it alone’, thousands of people every year turn to professional debt management companies with the experience and expertise to negotiate for them – and do it well.

“At Gregory Pennington, for example,” says a company spokesperson, “each client is assigned a Personal Finance Manager (PFM), who gets to know their situation, answers their questions, provides advice – and anticipates any problems or opportunities that might arise as their situation changes. The PFM also oversees all negotiations with creditors, making sure that their client is kept fully informed and that all agreements reflect the needs of lender and borrower alike.”

“The vast majority of creditors are keen to help borrowers repay their debts at an affordable, sustainable rate. In most cases, creditors would prefer to discuss a debt management plan’s proposals than push for bankruptcy – rather than giving up all their assets to make a partial repayment immediately, borrowers on a debt management plan can repay their entire debt, but more slowly, and without losing their home and other valuable assets.”

Debt management – one of many debt solutions
But debt management isn’t always the answer. Rather than joining a debt management plan, borrowers might be better off taking out a debt consolidation loan / mortgage, entering an IVA (Individual Voluntary Arrangement) or Trust Deed – or going bankrupt.

“Debt is a serious matter and the consequences of approaching it the wrong way can be disastrous. Finding the right way, however, can be extremely complicated. If someone’s in financial trouble, it’s vital they talk to a company that offers a range of debt solutions, so they can make an impartial recommendation based on all the factors (income, expenditure, assets, level of debt, type of debt, etc).”

Although bankruptcy is sometimes the best way forward, even the Insolvency Service states that ‘Bankruptcy should always be the last resort as the debtor will lose control of their assets and will be subject to bankruptcy restrictions, potentially up to 15 years’. No-one should consider bankruptcy without understanding all its consequences and speaking to a debt adviser about the alternatives – and debt management, as the numbers demonstrate, is clearly an attractive alternative.

The plus side of falling house prices

Panic is occurring in the property markets. After a decade and more of spectacular growth, the inevitable is currently happening. Price growth is slowing and, in some areas of the UK, house prices are starting to fall.

One report by Experian suggested a 7.6 per cent fall in prices over the next two years.

But with many homes out of financial reach of a vast majority of the public, are falling house prices necessarily a bad thing?

A recent BBC poll found that more people across the UK want house prices to fall than rise. Rapid growth over the last few years has prices many potential buyers out of the market, with only 19 per cent wanting prices to continue growing.

The study found that 28 per cent of people want house prices to fall in order to be able to move from their current home.

According to the research, the vast majority of these were first-time buyers, who have been the major victims in the property sector`s rapid success.

Between 1997 and 2007, the price of an average first-time property rose from £52,674 to £159,494, according to the charity Shelter. Such a rapid rise has left many unable to afford a home and having to rent instead.

While the rental sector has been booming as a result, the lack of affordable houses has gradually slowed the market down, with no new money entering the system. Combined with the credit crunch and global financial uncertainty, house prices have started to slow and even fall.

Prime minister Gordon Brown has announced plans for shared ownership schemes for first-time buyers earning less than £60,000 a year. It is a sign that the government knows there is a problem.

House price falls are not generally welcomed by economists and financial experts. In February Kate Barker, a member of the Bank of England`s monetary policy committee, warned that a downward spiral in house prices and a drop in mortgage lending are the biggest threats to the UK economy.

"The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil," she said.

Mortgage lending is slowing. Recent figures from the Council of Mortgage Lenders found that monthly mortgage requests had fallen to their lowest total since 1975.

A study by Moneyfacts found: "With falling house prices and borrowers finding it harder and harder to get a new deal, the lenders` standard variable rates are becoming a more attractive option, but these lenders do not want to take on the more risky borrowers who do not have enough equity in their home to get a good deal."

The situation goes full circle. The solution to the problem is a period of uncertainty, where the market can correct itself and make itself more affordable to the people who need it the most.

It may be painful in the short-term, but house price falls aren`t all bad.

Debt management helps the money go further

When someone can only just manage their monthly debt payments, how do they cope when the cost of living shoots up? According to consultancy Capital Economics, the average household is spending far more on food, bills and other unavoidable expenses than they were just 6 years ago, when these costs accounted for 25% of their income. Today, this figure stands at 31%.

The rising cost of living may be causing everyone hardship, but it’s particularly dangerous to borrowers, many of whom are finding their finances stretched to breaking point or beyond. Someone who could comfortably afford their repayments back in 2002 may well struggle to manage their debts today. In many cases, it’s a struggle they can’t win on their own: more and more are turning to debt management and other debt solutions.

Leave room to manoeuvre
“These figures prove a point we always emphasise: just because you can afford something today, that doesn’t mean you’ll be able to afford it tomorrow,” says a spokesperson for Gregory Pennington. “Managing debt can be like walking a tightrope if your expenses grow to take up every penny of your income.”

And increases in the cost of food and utilities aren’t the only danger here. “Your income could drop. Your mortgage / rent payments could rise. You might need to repair the roof or replace an expensive item like the freezer. Any one of these events could seriously reduce your disposable income. You can’t always predict these problems, but you can protect yourself against them by not taking out credit you can only just afford.”

But what if we need to take out a loan to get through a financial crisis, or buy a car so we can accept a new job? “Life is full of calculated risks. When things don’t work out as planned, our debt management plan can be the ideal way to bring income and expenditure back into line.”

Why debt management?
“When someone asks about joining our debt management plan, we start by discussing their situation and helping them decide which debt solution is right for them – it could be debt management, but it could be a debt consolidation loan / remortgage, an IVA (Individual Voluntary Arrangement) or a Trust Deed. If debt management is the best way forward, we talk to their creditors and find out what they can do to help our client repay the debt at an affordable rate.”

“The vast majority of creditors are understanding and realistic about people’s finances. If they see that someone on our debt management plan genuinely can’t maintain their payments, they’ll be prepared to negotiate: accepting lower monthly payments, waiving charges and/or freezing interest. And they’ll renegotiate if the client’s situation changes again. It’s in everyone’s interests to keep payments at a realistic level, and that level can change all the way through the client’s debt management plan, whenever their disposable income changes.”

Summer hols culled as debt worries grow

Over half of Britons will cut back on spending on their summer holidays this year as debt problems continue to mount, a new study has found.

Research from FairFX revealed that 57 per cent of Brits will be forced to cut back on spending - with many cancelling their break away altogether as financial stresses continue to mount.

A total of 55 per cent of respondents plan to curb foreign expenditure because the cost of living back home is too much for them and outgoings have increased drastically over the past few months.

Stephen Heath, chief executive of FairFX, said: "Brits have been forced to slash their holiday spending as the credit crunch and the hefty rise in the cost of living hits them hard in the pocket.

"Unless conditions change holidaymakers are planning to spend just £460 each on what should be the main break of the year."

According to Credit Action, the UK`s total personal debt increased by 8.9 per cent in the 12 months to the end of March.

Protecting yourself against a recession

It is a good time to batten down the hatches, pay off debt, make savings and prepare for the worst if you`re of a nervous disposition.

There is a one in three chance of the economy sinking into recession over the next two years, according to investment bank Lehman Brothers.

While many people may not currently be experiencing debt problems, getting personal finances into shape now - in preparation for potentially troubled times - may not be a bad thing.

The recent credit crunch has stirred the financial and property markets up in a way that has not happened since the early 1990s and, as a result, many people are not prepared for the outcome.

A recent study by Fool found that 22 per cent of working Britons - those aged between 18 and 34 - had never been through a recession before and were worried about the consequences.

David Kuo, head of personal finance at the company, said: "Young people who have not experienced previous recessions are understandably worried about the property market.

"They include both those who have just bought their first house and those who want to get on the ladder, but whose hopes are being dashed by over-cautious lenders."

The talk of a recession has already had an impact on the housing market. The Bank of England`s £50 billion liquidity boost earlier this month is a sign that things are not quite right at the moment.

Slowing property prices, combined with increasing mortgage repayments and large personal debts, could force many homeowners to miss important bills, potentially leading to repossession of property.

Liberal Democrat shadow Communities and Local Government secretary Julia Goldsworthy claimed that as many as 60,000 families may be at risk of repossession if recession hits.

"As living costs rise, and the credit crunch starts to bite, families are forced to cut back on essentials in order to keep a roof over their heads."

So how do you prepare for something that could, potentially, be so catastrophic?

If you`re thinking of moving home or changing job you might want to carefully weigh up the pros and cons. For example, it could be a bad time to take on a larger mortgage.

Clearing all debts now may help prepare for rockier times ahead, while delaying potential big purchases - such as a car - could free up some extra money to pay off debts or to line a savings account.

How long a recession lasts for is open to much debate. It could be a year, two years or five.

Tony Tan, of the Government of Singapore Investment Corporation, suggested that any recession could be worse than that of the 1970s, lasting for a number of years.

"We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years," he said.

Nevertheless, at the moment, the UK is not in a recession. In fact, as MoneyExpert`s Sean Gardner points out: "There is however a risk that we could talk ourselves into a recession by panicking."

Better be safe than sorry though.

Best way to budget? Cash beats plastic

When money’s tight, people often find that using cash helps them keep a close eye on their household budget – and in today’s economic climate, budgeting skills are more important than ever. On April 21, new figures from the British Retail Consortium (BRC) revealed that cash is now used for 60% of all transactions, up from 54% one year ago.

Higher mortgage payments, record costs of petrol, rising food costs… with many households finding their budgets stretched to the limit, there is “a widening gap between the amount spent in cash and the amount spent using cards, suggesting customers want to keep tight control of their finances,” as BRC Director General Stephen Robertson put it.

Budgeting: cash is simple; simple is good
When every penny counts, a simple oversight can easily push this month’s (and next month’s) budget into the red, so it’s not surprising that so many households are keeping such a close eye on their budgets.

“Hard-up customers are increasingly reluctant to spend money they haven`t actually got in their hands,” said Mr Robertson. This is the key point: although plastic’s convenient, old-fashioned cash can make budgeting easier. With cash, checking what’s left of the household budget is just a matter of looking in the wallet / purse.

And there’s a world of difference between different kinds of plastic. With debit cards, people risk spending more of their household budget than they realise. But credit cards bring additional risks: unless they can pay off the balance quickly, it’s easy to get caught in a ‘debt spiral’. High interest rates can easily push credit card debt far beyond the initial amount borrowed, so repayments take a small but significant chunk out of the monthly budget for years to come.

Spending in the shops: biggest decline since 2005
So many households have decided the best way to control their budget is to spend real notes and coins, rather than figures on paper. But in itself, that’s not necessarily enough. Also published in April, the BRC-KMPG Retail Sales Monitor March 2008 reveals a drop in spending: UK retail sales fell by 1.6% on a like-for-like basis*.

“This is the first year-on-year fall in like-for-like sales for two years and the worst result for nearly three years,” said Mr Robertson. “Here is the strongest evidence yet that customers are making serious economies and are increasingly concerned about the future.”

Nobody enjoys ‘tightening their belt’, but it’s good to see people are coping with these expensive times by cutting back on household spending, rather than borrowing more. After all, there’s no point in someone just watching their budget unless they can adjust their spending habits when the situation calls for it.

‘on a like-for-like basis’ – percentage change in the value of sales compared with the same period one year ago.

Banking on debt problems: what if my bank goes bust?

The expression ‘money in the bank’ has always referred to cash that’s 100% secure. But it seems banks might not be quite as safe as we thought – like individuals, they can have their own problems with debt. Although the government stepped in to save Northern Rock, the nation was still shocked by the reminder that it is possible for banks to collapse.

So what happens to investors’ savings if a bank does go bust? Thanks to the Financial Services Compensation Scheme (FSCS), they WON’T lose all their money, no matter what debt problems the bank is facing.

The Financial Services Compensation Scheme
The FSCS protects customers of companies regulated by the Financial Services Authority (FSA). As the ‘fund of last resort’, it will compensate these people if the company cannot pay what it owes them (normally because it is ‘in default’ – i.e. it has stopped trading and its debts outweigh its assets, or it has been declared insolvent).

The compensation rules changed on 1 October 2007.

Before that date, if a company was declared in default, the FSCS would compensate 100% of someone’s deposit up to £2,000, then 90% of the next £33,000.
But now, if a company is declared in default, the FSCS will refund every penny of someone’s deposit all the way up to £35,000.

So if you have more than £35,000 in savings, it makes sense to keep it in two or more separate banks. If you split £70,000 between two banks, just make sure they don’t belong to the same ‘parent’ organisation – if they share the same FSA registration, they’ll only count as one institution, so you’ll only be compensated for £35,000 (not £70,000) if they collapse.

How can a bank collapse?
In today’s financial climate, consumers aren’t the only ones facing debt problems. Banks and building societies can have their own problems with debt. A common, regular feature of the banking world, borrowing in itself is nothing to worry about, but the funds available to banks are becoming more limited right now: borrowing too much can be dangerous for a bank, and so can lending too much.

Take mortgages for example. Any company offering mortgages is aware that its customers might default on their payments or even have their homes repossessed. Some of them have granted mortgages worth billions of pounds, but today – with so many people struggling against serious debt problems – they’re not sure how much they’re going to get back.

So if enough people have enough problems with debt, this could spell serious trouble for a bank. Today, the LIBOR rate (London InterBank Offer Rate – the rate at which banks borrow from each other) is almost 1% higher than the base rate, which the Bank of England has just reduced to 5%.

Now that the nation as a whole is facing problems with debt, banks are very careful about lending money to each other, as they’re not sure if they would be able to borrow more money!

Debt problems - debt, taxes and the Budget

On a low income, dealing with debt problems is never easy - but for some people, this year`s Budget may have made it even harder. Although the Basic rate of income tax dropped from 22% to 20%, the Starting rate disappeared.

Before April 2008, the first £2,230 of someone`s taxable income was taxed at 10%, then the next £32,370 was taxed at 22% (see table). But now, everything up to £36,000 is taxed at 20%: losing the Starting rate means that people will pay twice as much on the first £2,230 they earn.

	2007/2008		2008/2009
	%	Taxable income	%	Taxable income
Starting rate	10	Up to £2,230	-	-
Basic rate	22	£2,231 to £34,600	20	Up to £36,000
Higher rate	40	Above £34,600	40	Above £36,000

In a nation where the average adult owes almost £5,000 in unsecured debt, any changes to someone`s income after tax could make a real difference to their efforts to tackle their debt problems. When they need all or most of their disposable income for debt repayments, even the smallest change could mean they need to look for debt help immediately.

Good news or bad news?
Overall, the changes could be good news or bad news, depending on how much you`re earning. For people on average or higher incomes, this was a good Budget. But according to the Commons Treasury Committee, some low-paid people could be around £20 per month worse off. Clearly, `finding` an extra £20 a month won’t be easy for people already struggling with their debt problems.

It seems £18,500 is the `break-even point` - the point at which people gain more from the lowering of the Basic rate than they lose from the abolition of the Starting rate. Of course, debt is a problem that affects rich and poor alike. Someone with a high salary and plenty of debt may be just as likely to need debt help as someone with less money and less debt. However, the two may well need different debt solutions: for example, the first person might consider an IVA (Individual Voluntary Arrangement), while the second could be better off looking into debt management.

Tax credits – the answer to debt problems?
Many people are unhappy with the government`s claim that a more generous tax credit system should make up for any loss. Why, they say, should they have to claim benefits to replace money they`ve paid in tax? While they’re waiting for their extra tax credits to come through, they`ll be struggling to keep up with debt problems that were already stretching their finances to the limit before their disposable income dropped.

Besides, many people don`t know what they`re entitled to, or don’t claim for it - and when the tax system assumes that people will make use of the tax credit system, anyone with debt problems who doesn`t take full advantage of it could soon find their financial situation going from bad to worse.

Retiring in debt: spare time but no spare cash

For some, retirement is a long-awaited opportunity to sit back and enjoy the things they’ve spent their whole lives working for. For others, it’s an unwelcome change: why should they retire when they feel they could go on working for years?

Whatever their attitude, most people approaching retirement know it’ll mean a reduction in income. But on top of this ‘traditional’ drop in salary, today’s older workers face a new problem which wasn’t really an issue when their parents and grandparents retired.

A study* by Help the Aged and Barclays has revealed that 1 in 4 people approaching state retirement age still have outstanding consumer credit commitments – and that the average borrower in their late 50s / early 60s has four times as much unsecured debt as someone in that group ten years ago. It seems today’s older workers are far more likely to need debt help before they retire, or even after.

Pensioner poverty
Levels of debt may be increasing in every age group, but younger people simply have more time to pay it off before they retire. As long as repayments don’t stretch their finances too far, their debts aren’t necessarily a problem.

In the past, most people have managed to pay off all or most of their debt before they come close to retiring. But today, more and more people come to the end of their working lives in financial difficulty and end up retiring in debt, struggling to manage their debts on a reduced, fixed income.

Understandably, Help the Aged is concerned about the impact of debt on older people: “This report shows that there are some worrying trends in credit usage that could represent a debt crisis for those coming up to retirement,” said David Sinclair, Help the Aged head of policy. “We know from working with older people suffering from chronic debt problems that even owing a relatively small amount of money can cause untold misery for those living on a fixed income.”

The study also found that:

Debts may already be forcing people to delay their retirement.
Older people use credit cards to cover essentials such as bills or even food.
Many households headed by an older person are still repaying their mortgage:
- 1 in 2 households headed by someone in their 50s,
- 1 in 8 households headed by someone in their 60s, and
- 1 in 25 households headed by someone aged 80-84.
For people in their 50s-60s, arrears on credit commitments are most common
For people aged 70 or over, utility bills are the main area of financial difficulty.

* The research was commissioned to support the work of Your Money Matters, a nationwide money management programme run by Help the Aged in partnership with Barclays.

Offering older people free, impartial money management and debt advice, the programme aims to:

improve older people’s knowledge, skills and confidence to manage their money,
provide practical, individual assistance to older people to overcome money management and debt problems, and
raise awareness of the issues of older people, debt and money management.

Mortgages, banks and interest rates

Once you’ve decided that home ownership is the way to go, you’re faced with another big decision: selecting the mortgage deal that’s right for you.

But for most of us, buying a house is something we’ll only do a few times in our lives, so there’s no way we can follow all the pros and cons of the different mortgages on offer. Online comparison sites and similar publications are useful, but it’s often much simpler and much better to go to the experts (mortgage brokers/advisers), explain your situation and see what they recommend.

Before you do that, however, here are a few interesting things to think about...

The base rate
The base rate set by the Bank of England (BoE) is the ‘benchmark’ for interest rates throughout the UK. It’s never a good idea to choose a mortgage until you understand where the base rate is headed – and how this can affect your payments.

In July 2007, the base rate reached 5.75%.
Today, it’s down to 5.25%.
Many experts expect it to drop below 5% by the end of 2008.

But the base rate can change rapidly and unexpectedly – once, in 1985, it leapt from 9.5% to 13.88% in about two weeks. Even though that was in response to highly unusual conditions, it shows that it can happen.

How does the base rate affect mortgages?
In theory, when the rate goes up or down, so does the cost of some loans and mortgages (but not all – see below). So in 1985, some homeowners saw their mortgage payments shoot up around 40% almost overnight.

But banks aren’t always obliged to follow suit. If the base rate drops by 0.25%, for example, a bank might reduce the cost of some mortgages by the same amount. This is a good way to attract customers, but that’s not always their top priority. If they’re more concerned about protecting their cash reserves, they might reduce their own interest rates by 0.20%, or 0.10% – or nothing at all.

Fixed rate, Variable rate and Tracker mortgages
In terms of interest, there are three basic kinds of mortgage – Fixed rate, Variable rate and Tracker – and each has a different relationship to the BoE’s base rate.

The simplest of these is the Fixed rate. As the name indicates, the interest rate you sign up to at the start of the mortgage will remain fixed for an agreed time, after which you’ll probably start paying the Variable rate (or choose a new mortgage). A Fixed rate mortgage provides the stability that many people need, whether they’re paying off debts through a debt management plan, saving for the future or simply on a tight budget.

With Tracker mortgages and Variable rate mortgages, the rate you pay will change over time. The difference is that Tracker mortgages automatically follow the changes in the BoE’s base rate, while Variable rate mortgages only follow at the banks’ discretion.

So when people think the base rate is on the way up, a Fixed rate makes sense. 77% of the mortgage deals last June / July were Fixed, according to the Council of Mortgage Lenders (CML).

But today, with the base rate expected to keep dropping, Tracker mortgages are becoming more popular – the CML reports that only 57% of January’s mortgage deals were Fixed.

Which mortgage is right for you?
It all depends on your situation: not just what you owe and what you earn, but how stable your circumstances are and how much risk you can handle.

If you can make your mortgage payments quite comfortably, you might choose a Tracker mortgage, so you can benefit from the base rate cuts the experts are predicting.

If, on the other hand, buying a house is really stretching your finances, it might make sense to look at a Fixed rate mortgage. It might be irritating to miss out on the expected base rate cuts, but what would you do if the experts turned out to be wrong? If your mortgage payments suddenly jumped by 10% or 15%, would you be able to cope, or would you find yourself seeking immediate debt help to stop your house being repossessed?

Young people count

It’s good to be optimistic, but hope is no substitute for understanding, especially when it comes to money. So it’s great to see teachers and businesses working together to prepare children for the financial realities of life, from banking and budgeting to debt and money management.

MoneySense for Schools
The Royal Bank of Scotland’s MoneySense for Schools programme is an excellent example of this. Teaching children how to handle their money, the programme is also helping schools understand children’s attitudes to (and comprehension of) financial matters.

Published in March 2008, the MoneySense Research Panel Report* is “an important addition to our understanding of young people’s attitude to managing their money”, says Chris Pond, Director of Financial Capability at the Financial Services Authority (FSA).

Ready for the real world?
In many ways, the report makes encouraging reading, revealing that children already understand many of the basics of money.

They’ve already picked up all kinds of good habits. For example:

82% (and 92% of 17-year-olds) thought it was important to save money
88% were saving for something at the time they were surveyed
79% claimed they kept track of their money
63% claimed they didn’t spend money which they needed for something else.

However, there were clearly some worrying gaps in their knowledge. For example:

50% couldn’t identify the cheapest APR and loan term
Only 36% of the 18 year-olds questioned would consider the interest rate when borrowing money.

There were also some signs that the youngsters needed to learn about the importance of budgeting:

Only 5% wrote things down to help them budget – 46% just remembered what they’d spent
When asked if they agreed with the statement ‘If I run out of money, I just get more from someone at home’, 63% agreed / strongly agreed, while just 34% disagreed / strongly disagreed.

Confidence or inexperience?
Asked what they expected in their own future, most children seemed aware of the financial pitfalls ahead, but confident that they’d be able to avoid them.

Without real-life experience, it’s easy to believe everything will work out as you’d planned. Perhaps that’s why the survey returned such mixed findings. On the one hand, it looks like many of today’s youngsters have a pretty good grasp of current events. On the other hand, ‘youthful enthusiasm’ can make it hard for them to understand what those trends mean for them as individuals.

For example: while 61% were worried about getting into debt in the future, only 26% thought they actually would get into debt. And although 68% of the youngsters who expected to go into higher education realised they’d get into debt while they were there, almost 25% thought they’d start paying it off before they’d finished their education. In reality, debt is often much harder to manage. Personal debt in the UK is growing all the time – and so is the number of people seeking professional debt advice or debt management solutions.

Only time will tell
It’s encouraging to see that tomorrow’s adults are able to understand the dangers of money without losing heart. But how much of that confidence is based on unrealistic expectations?

Although it’s good to dream of home ownership, for instance, it’s probably unrealistic to expect it early in life. Of the 59% who expect to own their own home before the age of 25, most will probably be disappointed. But salaries are likely to be an even bigger disappointment: the average respondent expected to be earning £70,000 a year by the age of 35! Maybe a a ‘reality check’ on salaries would lead to lower expectations in terms of home ownership, debt management, higher education...

*The 2007 MoneySense panel research findings are based on a representative sample of 8,454 young people, aged 11-19, in schools and colleges across England, Scotland and Wales.

Saving for a rainy day

No-one knows what the future will bring, but that doesn’t mean you can’t prepare for it. Whatever you earn and spend, experts recommend you set aside at least three months’ salary for a rainy day.

But not everyone can do that. For millions, a savings account might not be an option. It might not even be a good idea – yet.

Save up or pay off debts?
Imagine someone already has £5,000 in a savings account but owes £5,000 to one credit card, two personal loans and an overdraft. Although they’re making money on their savings (probably earning 5-6% in interest), they’re also losing money on their debts (probably costing 15-20% in interest).

Should they use their savings to wipe out their debts? The answer may be ‘no’ if they’re:

comfortable ‘carrying’ that debt,
able to afford the interest charges, and
unwilling to spend the money they’ve saved up.

Even so, it might be a good idea to figure out how much of their savings they really need to hang onto. They might decide to use half of their savings to pay off half of the debt – saving themselves a lot of interest charges without giving up their ‘emergency fund’. Or they might choose to wipe the slate clean by getting rid of their savings and their debts at the same time.

Ways out of debt
Unfortunately, not everyone in debt has that option. But even if they can’t repay their debts in one go, they should still aim to pay them off as soon as possible, so they can stop paying for yesterday and start saving for tomorrow.

Depending on the type of debt they’re facing, they can either tackle it themselves or choose from the various debt solutions available today.

Some people bring their unsecured debts under control by consolidating them with a remortgage or loan. This can reduce the amount they’re paying back every month, although it’ll probably mean they spend longer paying off the debt and could (with a remortgage or secured loan) put their property at risk of repossession.

Others look into debt management. With a debt management programme, people ask a debt specialist to manage their debts for them, asking creditors to accept lower payments and freeze or reduce interest and charges.

For people with more serious debts (normally over £15,000), an Individual Voluntary Arrangement or IVA might be more appropriate than debt management or consolidation. A legally binding agreement with their creditors, an IVA lets them pay a fixed amount every month (based on what they can afford after essential living expenses). After a fixed period of time – normally 5 years – the IVA finishes. Their remaining debt is written off and they’re debt free.

The ‘trick’ is to keep up the habit of making monthly payments once the debts are paid off. With the debts gone, those payments can go into a savings account – saving up for future expenses instead of paying for past ones.

Saving in tough times
Right now, we’re all affected by the nation’s (and the world’s) economic worries. Food, petrol and utility bills are rising, personal debt is at an all-time high, and credit is becoming harder to obtain.

On the one hand, this can push people to save: when we see tough times ahead, we’re more likely to try and put some ‘rainy day’ money aside. But tighter budgets can also make it harder to make any headway.

In February, Birmingham Midshires’ Saving Britain report seemed to back up both these points. Comparing today’s figures with last year’s, it brought good news and bad news about saving.

At the start of 2007, 66% of respondents were putting money aside. On average, they’d saved £813 over the past three months, but ‘raided’ their savings to the tune of £349. Average savings: £464.

At the start of 2008, 69% were putting money aside. On average, they’d saved £814, but taken £961 from their savings. Average savings: minus £147.

While it’s encouraging to see saving becoming more popular, it’s worrying that it also seems to be harder. In tough times, it looks like many would-be savers seem to try harder – but achieve less.

Making money or saving money - why do we buy?

After more than a decade of rapid price rises, buying a home is still cheaper than renting. So says the latest annual UK Rent versus Buy Index from Abbey.

The Index concluded that the average home would cost £437,925 to buy (with a 25-year mortgage at 6.5%), while the average cost of renting would total £443,736 over the same period.

	£443,736	(renting)
-	£437,925	(buying)

---------------------------

£5,811

cheaper for homeowners – £232.44 per year

(Of course, homebuyers also end up with a substantial asset at the end of the period, but the Index focuses on the 25 years in question.)

The figures can change quickly: just last year, Abbey’s Index calculated that buying a home would work out over £24,000 cheaper than renting. If house prices came down, for example, the figures could swing more heavily in homeowners’ favour again.

But whatever happens, the start of the credit crunch and the end of the house price boom have led to a fundamental shift in the mathematics of house-buying.

Rather than “How much would this home make me?” the question may now be “How much would it save me?” Of course, it depends on what’s about to happen to house prices, a question that’s always sure to spark off a lively debate.

What’s next for the housing market?
Some are predicting a house price crash – good news for would-be buyers but terrible news for the millions potentially left with negative equity and huge debts. Others point out that the UK’s a small country with a large population, so the demand for houses won’t let prices fall too far.

Almost no-one expects prices to start ‘booming’ again soon, which comes as a relief to millions of potential buyers. Double-digit growth can easily lead to a sense that whatever your finances today, houses will be less affordable tomorrow, and even less affordable the day after that. In recent years, many people have ‘jumped too fast’, and many are now finding themselves in urgent need of debt help.

But when prices aren’t rocketing, people feel they can take their time and buy a house when the time is right for them.

Is the time right for you?
If you’re thinking of buying, a look at your finances might prove more useful than speculation about the housing market.

Income:

Are you in line for a pay-rise, in danger of losing your job, or neither?
Is your income dependent on overtime / bonuses that might not always be available?
If you’re receiving any benefits, are they about to change – and if so, for the better or for the worse?
How likely are you to receive a ‘windfall’, such as an inheritance, an insurance policy maturing or financial compensation of some sort?

Expenditure:

Are you planning on having children? If you already have a family, are the kids about to leave home or just entering an expensive age?
Do you have any expensive ‘habits’, from fast cars to fancy holidays? Could you honestly give them up, and how much could you save if you did?
Are you in debt? How long will it take you to get out – and could you do it any faster? Do you need professional debt help or debt advice?

These are just examples, but this simple list demonstrates an important point: you don’t know what tomorrow will bring, but if you’re confident about the rough direction your finances are heading in, your own future is probably a lot more predictable than the housing market’s!

Predicting the future
Of course, there’s no accounting for bad luck: a series of disasters could easily add tens of thousands of pounds to the cost of owning a home. On the other hand, a £750 rent could easily be £2,000 25 years from now, while the final monthly payment on a fixed rate mortgage wouldn’t be any more expensive than the first.

In short, buying and renting both come with risks, and the individual’s decision depends on their personality as much as their finances. Studies of the housing market can give you all kinds of valuable information, but they can’t reveal what’s right for you.

Wealth, Debt, Age – and a Decade of Change

According to the Office for National Statistics, the average income rose by 92% during the 10 years following 1995 – but the average house price rose by 204%.

For homeowners, this was unquestionably a profitable period. Many were able to draw on the rising level of equity in their homes, taking out secured loans and remortgages to finance their ambitions and / or manage their debts. For those who didn’t borrow against it, their home effectively acted as a high-interest savings account.

But for millions outside the housing market, the constant house price growth either put their dreams of home ownership on hold or led them to take massive mortgages, risking severe debt problems.

The financial impact of home ownership
So today, home ownership has a much greater impact on an individual’s levels of wealth and debt than it did before the house price boom. To quote the Bank of England’s Quarterly Bulletin: ‘…the evidence suggests that the growth in household debt (about 80% of which is in the form of mortgages) has been associated in large part with higher house prices.’

There’s a world of difference between paying a mortgage and owning a home outright – and age is clearly a factor here.

55-64 year-olds

	1995	2005	Increase
Wealth*	£75,000	£165,000	120%
Debt**	£8,000	£12,000	50%

35-44 year-olds

	1995	2005	Increase
Wealth*	£35,000	£65,000	86%
Debt**	£31,000	£54,000	74%

Source: the Bank of England’s Quarterly Bulletin ‘The role of household debt and balance sheets in the monetary transmission mechanism’.
* Mean household net financial wealth + housing assets. To nearest £5,000
** Mean household debt. To nearest £1,000

Homeowners: 55-64 years old
In general, older people are far more likely to have:

owned their home long enough to have benefited from the entire house price boom, and
paid off their mortgage.

If their children have left home, they may have even moved to a smaller property, freeing up some / all of the money they’d invested in property.

And they’re more likely to be thinking about financing their retirement, by downsizing, for example, taking in a lodger, selling up and moving into rented accommodation, or looking into a lifetime mortgage or home reversion plan.

Finally, they may have grown used to not making monthly mortgage payments – and be unwilling to start again.

On the whole, it’s easy to see why someone in the 55-64 age range is statistically likely to own more and owe less than someone 20 years younger.

Homeowners: 35-44 years old
Lifestyle changes, such as having children, can easily push people into debt problems – when they move to a larger home, for instance, or finance an extension on their current home.

Younger homeowners are also more likely to have bought their home since 1995.

Even if they bought their first home in 2002, they’ve still suffered from the house price boom. Although they’ve benefited from the rapid increases in the last 6 years, they still paid (and probably borrowed) a lot more for their property than they would have in 1995.

Given the current state of the housing market, someone who bought their first home in 2007 / 2008 may even find themselves owing the bank more than their home is worth. This ‘negative equity’ would mean they couldn’t remortgage if their financial circumstances took a turn for the worse – although they could still consider other forms of debt help, such as debt management or an IVA.

When home ownership isn’t an option
When house price growth outstrips salary growth so drastically, many people give up on the idea of home ownership altogether.

Without the cost of buying and maintaining a home, tenants tend to borrow far less than homeowners. On the other hand, they don’t build up equity either. So tenants tend to reduce both the average ‘Wealth’ figures and the average ‘Debt’ figures in the tables above.

Although the cost of home ownership can discourage people of any age, it’s worth noting that household debt in the 18-34 age range has actually decreased since 1995, quite possibly because so many people below 35 have not entered the housing market at all.

Counting the cost of Christmas

Every year, retailers everywhere look forward to Christmas as the time of year when shoppers really splash out, spending money on things they normally wouldn’t even consider.

Certain newspapers and news channels seem to glamorise the event, painting a picture of shops fighting for custom – and shoppers fighting the temptation to spend.

So every January, we hear all the stories about the financial consequences of Christmas. Either we’ve spent too much and need to get our spending under control, or we’ve spent too little, which means hard times for the shops and worries about the economy in general.

This year, we’ve been hearing mixed messages.

The shop’s perspective – spending too little
As last year drew to a close, the financial news grew gloomier every month. By the time we started the run-up to Christmas, the news was full of stories about the credit crunch and falling house prices. Many analysts promised a gloomy Christmas for shops, with pessimistic shoppers reluctant to spend their limited budgets.

In January, shops across the country began confirming those expectations, reporting a Christmas of disappointing sales and shrunken profits.

In February, the UK payments association APACS revealed that spending on plastic was up from Christmas 2006, but only by 4% – nowhere near the increases of almost 9% we’d seen in recent years.

The shopper’s perspective – spending too much
With so many unhappy shops, you might think shoppers had kept a close watch on their finances this Christmas. Yet lower profits don’t necessarily mean lower spending – millions of people spent more than they intended at Christmas.

Online shopping was up 269% on Christmas Day itself, according to Market research firm IMRG. And Experian`s Retail Footfall Index revealed a 25.1% increase in shoppers on Boxing Day.

Where did the money go?
When shops slash prices to bring in the customers, it often works – but at a price. With greater numbers of people buying heavily discounted goods, the shops can sell more but still fail to make the kind of profit they’d like to see.

And when the cost of living rises too sharply, shops can lose out even when shoppers spend more. In February, the Office for National Statistics reported that ‘factory gate inflation’ (growth in the price of goods when they leave the factory – not the price consumers pay) had hit a 16-year high, largely thanks to rises in the price of oil and food.

2008 – tough year for everyone?
So we start 2008 in an awkward situation, with shops and shoppers alike suffering financially.

The KPMG/SPSL Retail Think Tank sees a tough year ahead for shops, as consumers struggle with falling disposable incomes and consumer confidence drops as a result of lower bonuses, worries about the housing market – and, of course, the credit crunch.

As for shoppers: Sainsbury’s Finance organised a survey at the end of last year (30 November - 2 December). They calculated that around 8.6 million people were planning to use plastic for half or more of their festive spending. Only 61% of UK shoppers expected to finish paying for Christmas within a month, and 1% (almost half a million people) thought they’d still be paying for this Christmas next Christmas!

United in debt - United Kingdom and United States

A snapshot of debt in the US and the UK at the start of 2008.
(approximate figures)

	US	UK
Population	301 million	61 million
Adult population	226 million	49 million
Total debt (£)	7 trillion	1.409 trillion
per adult (£)	31,000	29,000
Secured debt (£)	5.75 trillion	1.185 trillion
per adult (£)	25,500	24,500
Unsecured debt (£)	1.25 trillion	224 billion
per adult (£)	5,500	4,500

Secured debt
A secured debt is a debt secured by a ‘lien’ – a legal right to a portion of someone’s property. If it isn’t repaid, the lender has the right to push the homeowner to sell up and pay them back. In general, lenders are more likely to offer larger amounts at lower interest rates when a loan is secured like this.

In recent years, rising house prices have allowed homeowners on both sides of the Atlantic to ‘use their home as a cash machine’, as many analysts have put it. Constant growth in house values has given them access to large sums of money: if the house which someone bought for $200,000 is now worth $300,000, they can borrow $100,000 against this extra value (as long as they can afford the repayments) by remortgaging or taking out a secured loan / home equity loan.

While house prices continued rising, many homeowners kept borrowing against their property like this, and many would-be homeowners took on mortgages which stretched their finances to or beyond breaking point. If necessary, both groups knew they could sell their home and (hopefully) make enough profit to pay off their debts.

But when house prices stopped ‘rocketing’, homeowners could no longer count on their property to make them money – but they did have to keep on repaying the money they’d already borrowed against their home (or borrowed to buy the home in the first place). Some homeowners are even faced with ‘negative equity’: having borrowed heavily against a property whose value has dropped, they owe more than it’s worth.

Unsecured debt
When someone can’t (or doesn’t want to) secure a loan against property, lenders are less likely to agree to a large loan and / or a low interest rate.

For years now, lenders have been relaxing their criteria and lending to people they once wouldn’t have considered for credit. As a result, the UK and the US both entered 2008 with unprecedented levels of unsecured debt.

That debt didn’t build up overnight – in the US, for example, unsecured debt almost doubled between 1988 and 1998, and then again from 1998 to 2008.

What’s next?
These days, the ‘credit crunch’ means that it’s harder to borrow money, whether it’s £5,000 for a car or £200,000 for a house.

When lenders began worrying that too many people couldn’t repay their loans and mortgages, they started being much more cautious about lending money (whether secured or not) to anyone who didn’t have a spotless credit history. The majority started turning down more applications for credit and charging higher interest rates when they did say ‘yes’.

Only time will tell when they’ll ease up on their restrictions – despite cuts to interest rates in both countries, most analysts are predicting that 2008 will be a year of tight credit conditions.

It pays to talk about debt

"Better to remain silent and be thought a fool than to speak and remove all doubt."

We might not put it in those words, but we all know what it means – when we’re embarrassed about something, the last thing we want to do is share it with other people!

Sometimes, however, it is better to speak up. If we keep quiet about a problem, we won’t receive any help or advice from people who`ve dealt with similar difficulties in the past. Take money: whatever financial problems we`re dealing with, we won’t be the first. All kinds of people have been in (or helped people in) situations like the ones we’re facing, and there’s a lot we could learn from them.

So why don`t we talk about our finances? When fool.co.uk asked people about their attitude to money, they found that 66% saw it as a personal subject which should be kept private, and 30% felt that talking about money was actually rude.

"If the UK was full of people with fat bank balances and thin credit card statements, " says a spokesperson for Gregory Pennington, "that might not be a problem. Unfortunately, that isn’t the case."

Price comparison site uSwitch reports that almost 10 million UK residents see their borrowing as unmanageable. So why are`t we talking?

"First of all, there’s the `ostrich` factor. When we face up to our debts, we`re forced to admit that they’re real and they aren’t going to go away by themselves. Maybe that’s why more than two and a half million people in the UK don’t even know how big their debts are, according to a report by unbiased.co.uk. Until we admit our financial problems to ourselves, there’s no way we can talk to other people about them."

"Then there’s the embarrassment. It`s easy to think that people will look down on us for getting into debt, even though it`s so common these days – in an increasingly complex financial world, it’s easy to lose track when we’re juggling mortgages, car finance, credit cards, overdrafts…"

Even in the current credit squeeze, it`s still easier to get credit today than it was in, say, 1950. That’s not necessarily a problem. There’s nothing wrong with taking on small debts that we can easily afford – the problems start when the repayments begin taking up income we need for other things.

But there’s no clear line between `manageable` debt and `unmanageable` debt, so how do we know when we’re sailing too close to the wind? One of the best ways to stay safe is to stay informed: talk to friends and family and don’t be afraid to get some professional debt advice.

"People are often surprised how much difference a few words of advice can make. They’re also surprised when they find out how many different debt solutions have been developed to help them get back in control of their finances, from debt management programmes and debt consolidation loans to Individual Voluntary Arrangements (IVAs) and remortgages."

"Once they’ve talked it over with a debt adviser, weighed up the pros and cons and decided which solution (if any) is right for them, they tend to find it’s easier to tackle their debt head-on – and wish they hadn’t kept it to themselves for so long."