Money news, advice and predictions for savers and spenders.
By Jeremy Gates
With unemployment expected to top four million and many households already suffering from reduced income, there are fears that massive credit-card debts could trigger more economic turmoil.
Britain, where consumer debt in proportion to income has climbed above 170%, is seen as more vulnerable to such a crisis than European countries and the United States, where the International Monetary Fund fears 14% of consumer debt will turn sour.
The IMF believes consumer debt losses in Europe could hit £1.5 billion - much of it in Britain.
A lot of this debt, such as sub-prime mortgages, was securitised - passed on to new holders - and The Financial Times warned this week that the impact could extend beyond banks, possibly hitting insurance companies and pension funds.
Our plastic-fuelled spending spree is unravelling fast. Outstanding card debt tops £64 billion, but with average interest rates at 18% - or 36 times current Bank base rate - that's a big strain on the 40% of card-holders who pay interest on outstanding balances.
Andrew Hagger at Moneynet.co.uk believes that card companies may have kept their rates high in defence against the looming problems.
"If the debt situation worsens, rates could top 18%," he says. "I see big write-offs coming, as an increasing trend."
Over two years, the noose has slowly drawn tighter on those who have overspent. The old trick - keep switching debt to new cards with 0% balance transfers - is harder to pull off as providers tighten terms.
Capital One, a leading provider, has withdrawn 0% balance transfers altogether. Barclaycard's 0% offer on balance transfers is down from 14 months to 12 and other providers - including Royal Bank of Scotland and its brands, and HSBC - restrict balance transfers to existing customers.
"Nearby everybody who could qualify for Virgin Money's 0% balance transfer for 16 months has probably got it by now," Hagger says. "It's been the first port of call for a long time."
Hagger notes that a few products remain for clients with good credit records: Santander's 0% balance transfers runs for 15 months, while two others offer 0% for 13 months - Halifax Mastercard and BT Visa Credit Card.
Daniella Lipszyc, solicitor and director at North-West law firm Ultimate Law, which advises card-holders in trouble, fears that some consumers face 50 years of suffocating debt.
"Introductory offers, such as 0% balance transfers and 0% APR for the first few months, get consumers signed up," she says.
"Many don't realise that once the initial period of the agreement ends, rates can rocket and interest payments can get out of hand.
"It takes almost 50 years to clear a debt of £5,000 by making the minimum repayment each month, on a typical APR of 16.9%. Over that time, you'll pay a staggering £10,773.93 in interest."
Lipszyc argues that no signed and properly executed agreements were completed for many new cards. Some lenders see this will cause problems if cases go to court are hiring debt collectors to pressurise clients, at home and at work.
"One of my clients has card debts of more than £150,000, but £10,000 is enough to get many into trouble," she says.
Card providers, for their part, are also under pressure: they have lost rich pickings from the sale of Payment Protection Insurance with cards due to new regulations, and have seen penalty charges which they levy on late payers cut by Government action.
But they can always raise rates. Lipszyc believes card providers have "terrific freedoms" despite the new controls.
"My husband had an AMEX card charging 19.6% which jumped to 26%- a 33% rise - a few days after Bank base rate hit 0.5%," she says.
As problems deepen, Lipszyc thinks providers may accept deals - perhaps accepting a portion of a £10,000 debt - to tidy the books.
But the providers' decision to raise the spending limit for many customers in recent months - without being asked to do so - could backfire badly.
Price-comparison service uSwitch.com reckons 5.7 million people received a boost to their credit-card limit in the last year without being told about it, giving an average £1,538 per person for an extra £8.8bn of spending power.
"In the current climate, you could be fooled into thinking that increasing spending limits is a good thing as it stops people going over the limit and incurring extra charges," says uSwitch's Says Louise Bond.
"However, the issue is far more complicated. Providers are taking away consumer choice by throwing extra credit at people without their consent.
"Unless you regularly pay off your credit card bill in full, keeping high levels of debt on interest-bearing credit cards isn't advisable. It's an expensive form of borrowing."
Peter Harrison, credit-card specialist at Moneysupermarket.com, says consumers must be aware of different rates charged on balance transfers and new purchases. A tempting 0% on balance transfers might run for 12 months, while new purchases incur interest charges after three months.
Both Nationwide and SAGA cards, he says, offer a 'positive hierarchy' of repayment - money paid back each month cuts debt attracting the highest rate of interest.
"The fact is that many people who can't repay debts intend to keep paying the minimum monthly sum required - usually 1%-5% of outstanding balance - in the hope something turns up," he says.
"It isn't really the best way forward. If you don't begin to start paying debts off, lenders may be entitled to increase rates because of higher risk."
If you fear your card debts are out of control, the experts urge you to seek help - either from the card provider, or a debt advisor.
"The advantage of admitting problems is that the card provider is less likely to increase rates while the customer tries to sort things out," says Harrison.
"Those who bury their head in the sand to avoid the problem could be most at risk of losing their homes in the months ahead."
:: Information: Consumer Credit Counselling Service (0800 138 1111 and cccs.co.uk); National Debtline (0808 808 4000 and nationaldebtline.co.uk); Credit Action (020 7436 9937 and creditaction.org.uk); Citizens Advice Bureau (citizensadvice.co.org.uk); Ultimate Law (0161 710 2030 and www.ultimatelawltd.com).
Avoiding the card sharps
Do you want a card for its cashback, its 0% balance transfer, spending abroad or cheap credit? Consumer champion Which? offers these 13 tips for finding the 'best buy' - for more information and card comparisons, see its website which.co.uk.
:: Remember that cashback card-holders can lose all cashback earned in a year if they don't pay their bill on time or exceed a credit limit two months running.
:: Don't be fobbed off by a lack of clarity on key details like order of repayments. Many cards do not allocate payments to the most expensive debt first.
:: Don't be confused by lack of comparability between rates, due to differing calculation methods. Which? warned the Office of Fair Trading (OFT) about this in 2007.
:: Watch for increases in key features: cash withdrawal fees, cash withdrawal APRs, increases in balance-transfer fees and removal of balance-transfer fee caps.
:: Remember that reductions in minimum repayments can encourage those in trouble to stay in debt.
:: Ask questions to find if there are any exclusions to your deal. Some 0% transfer deals expire if you don't move an existing card debt to the card within a specified period.
:: If you were mis-sold Payment Protection Insurance cover on card debts, you might be able to get money back via the Which? online tool at www.which.co.uk/ppiclaim.
:: Under Section 75 of the Consumer Credit Act, credit card purchases of £100-£30,000 are protected if a retailer fails to deliver or the purchase is faulty. Don't let card providers block a claim.
:: Match the benefits of a card to spending habits. If you pay the bill in full each month, the APR is not important and a card with rewards is more suitable.
For cheap credit, Barclaycard and Simplicity VISA (both 6.8%) are good value - but cards are one of the most expensive forms of credit.
:: Check the order of repayments on 0% transfers - some cards offer a shorter 0% period on purchases than on balance transfers, so purchases are trapped at the higher APR when that part of the deal runs out.
To be safe, when you transfer a balance to a new card, don't use the card for anything else.
:: If card rates and charges rise, raise it with your provider. If necessary, find another provider.
:: Remember a provider's advertised interest rate may not be the one charged to an existing customer.
:: Beware unwanted credit limit increases and credit card cheques. Just because they're offered, it doesn't mean you have to use them.
Poundnotes
:: Seven in 10 of the over-50s are jittery about their finances in retirement, says pensions and insurance group LV=. It found that half of over-50s (9.6 million people) believe they will be worse off because of the April 2009 Budget, despite a Government pledge to protect pensioners.
Less than a third of the over-50s have a clear idea of the value of their pension pot.
:: Banks and building societies are adding bigger bonuses to savings accounts as a temporary measure to boost rates to savers, says Michelle Slade at Moneyfacts. Of the top-10 easy-access rates available at present, seven include significant bonuses.
"The onus is on savers to remember when a bonus period ends. To ensure you don't get caught out, make a note on your diary to review savings needs at that time," Slade says.
:: Car insurance rates are rising at the fastest rate for nearly a decade and rose more than 1% per month in the past quarter, says the AA British Insurance Premium Index.
Average quoted premium for annual comprehensive car cover rose 3.5% to £778. What people pay, after discounts, rose 4.4% to £526.42.
Average quoted premium for third party, fire and theft cover, typically bought by young and inexperienced drivers, rose 4.6% to £968.22.
:: If you switch your bank current account to one of the two Santander brands - Abbey or Alliance & Leicester - regular savers can earn 6% AER gross on savings if paying in the maximum £250 per month over 12 months. If you play their cards right, you can also get a 6% return on your current account.
Andrew Hagger at Moneynet.co.uk says: "For savers who can contribute 12 equal monthly payments without needing to access their account, this is definitely worth a look."
:: High five savers:
Phone No Rate Account Period Deposit Interest paid
Barnsley BS www.barnsley-bs.co.uk 5.40% (F) Online Bond 30/09/14 £100 Yly
Aldermore 01372 736700 5.40% (F) Fixed Rate Bond Five Year Bond (P) £10,000 Qly
United Nat'l Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly
Manchester BS 0161 923 8015 3.26% Premier ISA 45 Issue 1 45 Days £1,000 Yly
Nottingham BS 0845 155 6330 3.15% Postal Access 50 50 Day (P) £1,000 Yly
:: Top-five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes
First Direct 0845 610 0100 3.09% variable for term 80% £999 Yes
Co-operative Bank 0800 633 5286 3.24% to 30/09/12 75% £995 Yes
Loughborough BS (FTB) 01509 610707 3.39% for two years 80% £449 Yes
First Direct 0845 610 0100 3.69% for term 75% £299 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
