Know your enemy - and the enemy is debt

29 July 2008

From battlegrounds to boardrooms, ‘Know your enemy’ is the golden rule of struggles everywhere. On a personal level, says debt management company Gregory Pennington, it’s just as relevant – most of us don’t engage in deadly combat these days, but overwhelming personal debt makes a fearsome enemy…

Understanding debt: the start of managing debt
What’s the difference between manageable debt and unmanageable debt? It varies from person to person, but the ‘rule of thumb’ debt advice is that anyone whose unsecured debts total more than half a year’s income is in trouble.

What’s almost as dangerous, however, is not knowing how much you owe. The vast majority of us have to get by with a pretty limited disposable income, so knowing how close we are to that limit is an essential part of managing our debts.

So the results of a recent CreditExpert.co.uk survey make troubling reading: 74% of respondents couldn’t accurately state how much they owed on their loans. Even worse, 10% had no idea at all how much they owed! For anyone in that ‘no idea’ group, getting to grips with their debts should be a no.1 priority – unless they do, they won’t even know when their debts are approaching unmanageable levels.

Debt management in tough times
Today, we’re dealing with higher interest rates and expensive food and fuel and we’re facing troubles in the housing and credit markets. In other words, we’re trying to achieve more with less – trying to stretch our budgets further, at a time when credit is generally harder to come by and more expensive. Inevitably, this makes debt management more difficult for just about everyone, and almost impossible for some.

The Q2 Credit Conditions Survey from the Bank of England (BoE) confirms that:

1) Lenders have reduced the availability of:

• secured credit for the last two quarters
• unsecured credit for the last four quarters

...and lenders expect the availability of both to decrease further in the next quarter.

2) Lenders have become understandably ‘risk averse’, since default rates on:

• secured credit have risen for the last four quarters
• unsecured credit were higher than expected in Q2

...and lenders expect defaults on both to rise further in the next quarter.

Lenders are facing their own problems and can’t always provide the debt help (in the form of credit) which people need. They can’t risk stretching their finances too far, so more and more people are being forced to manage their debts without debt consolidation loans, remortgages and credit cards. It isn’t easy, but if these tough times teach us to appreciate the importance of managing our debts, at least the credit crunch will have achieved something worthwhile!

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Gregory Pennington is a member of DEMSA whose code of conduct is approved by the Office of Fair Trading.