CREDIT CARD DEBT

 

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BBC News Ask the Expert column gives readers a chance to get their financial questions answered by experts.

 

This week, Meg Van Rooyen of National Debtline, a free telephone helpline for people with debt problems, helps reader Charlotte Banks.

 

Ms Banks is struggling to pay back almost 10,000 she owes on credit cards. Debt collectors are now involved in recovering part of the debt, and she is worried about court action.

 

She has opened another bank account to ensure she has enough money to live off, but she is still struggling to pay back the money she owes.

 

 

 

Credit cards, Visa, Mastercard, Barclaycard

 

Credit cards make it easy to get into debt, if you are not very careful

 

 

 

 

It is important that you start by looking at your debt situation as a whole. There is no point making arrangements to pay one of your creditors without dealing with all the other debts you have too. We would suggest you start by working out a personal budget.

 

This should list your monthly income from all sources and the ordinary essential monthly outgoings you need to pay to keep the roof over your head.

These include mortgage or rent, fuel, council tax, water, telephone, TV licence, insurance, housekeeping, clothes, travel and son on.

 

Do not include the payments you are supposed to make on any unsecured credit such as personal loans, overdrafts and credit cards at this stage.

 

The aim of the personal budget is to see what you have left over after all your essential outgoings have been met. This figure represents the available income that you can realistically afford to use to pay your unsecured creditors.

 

 

Making an offer

 

You can then work out how much to offer to pay each of your creditors on a monthly basis so they each get a share of your available income. The fairest way of doing this is to make offers on a pro rata basis.

 

You can either make offers to your creditors yourself by writing to them with a copy of your personal budget.

 

Alternatively you may be able to get a free debt management plan which enables you to make one payment a month which is divided up amongst your creditors for you.

 

Make sure you pay all your essential outgoings first, and avoid any debt management company that charges you fees to set up a debt management plan.

 

You cannot force a creditor to accept an offer of payment. But if they can see that you have worked out a reasonable budget plan, and each creditor is getting a fair share of the money available, they are likely to accept.

 

Ask them to freeze any interest to stop the debt growing even bigger.

 

 

Court action

 

If the creditor takes you to county court, you can offer to pay the debt off - in instalments you can afford - by filling in the forms the court will send you.

 

All creditors and debt collection agencies have to follow the Office of Fair Trading (OFT) debt collection guidance.

 

This includes "putting pressure on debtors or third parties is considered to be oppressive."

 

You can complain to the debt collection agency and your local trading standards department and to the OFT. The guidance is on the OFT's website.

 

You have done the right thing in moving your wages into a new bank account.

 

This means you have control over your finances.

 

It is a good idea to choose an "instant access" type account with no overdraft or cheque facility. A list of these can be found on the Financial Services Authority website. The overdraft can be included with your other credit debts when offers of payment are made. 

 

Credit card debt is an example of unsecured consumer debt, accessed through ISO 7810 plastic credit cards.

Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.

The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default". The late payment penalty itself increases the amount of debt the consumer has.

When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.

If the customer is carrying an amount of debt that is so high that it is over their credit limit, then they might be charged an over-the-limit fee of up to $39 until their balance is paid down to below their credit limit. This, too, may add to the consumer's debt.

 

 

Credit card debt statistics

  • United States (April 2005) $753 billion

  • United Kingdom (July 2004) 55.1 billion

  • Australia (2007) $41 billion (AUD)

 

Credit card debt is said to be increasing in the industrialized countries. The average U.S. college graduate begins his or her post-college days with more than $2,000 in credit card debt.

 

 

Bankruptcy concerns


Sometimes the late fees, high annual percentage rates (APRs), and universal default overcome consumers who frequently do not pay off their debt, and the customer declares bankruptcy. If a customer files for bankruptcy, the credit card companies are required to forgive all or much of the debt, unless such discharge of debt is successfully challenged by one or more creditors, or blocked by a bankruptcy judge on legal grounds irrespective of creditors' challenges.

Because forgiveness of debt reduces likelihood of profit and continued survival, the companies are generally willing to offer another deal to the consumers in danger of bankruptcy. This deal consists of reduced APRs, removal of past late fees and penalty charges, and reaging the accounts so that the credit agencies see them as late accounts.

 

 

Political aspects


Some credit card companies made lobbying efforts at the federal level to tighten American bankruptcy law, making it harder to have credit card debts canceled.[2] Recently it was reported that Americans are paying off credit card debt more frequently, and this was attributed in part to the bankruptcy legislation supported by the companies.

Germany, as an example for a country which did not have a notion of personal bankruptcy at all until the early 2000s, and still makes the process very much more difficult than the United States, has consistently had much lower levels of credit card debt. On the other hand, a debtor in Germany is very much in a worse position than one in the United States.

 

Reality check

 

The first step on the road out of debt is to admit - to yourself - just how much trouble you're actually in.

 

So, before you do anything else, work out your expenditure, and exactly how much you owe.

 

Once you've done this, you should have a much clearer idea of where corners can be cut.

 

According to Fool.co.uk, seven out of ten credit applications are likely to be rejected by the time we reach 2012.

 

For the millions of Britons who are currently getting by on plastic, this is obviously a pretty scary thought. What would our lives be like if we couldn't use credit cards, or go into our overdrafts, or take out loans?

 

However, every cloud really does have a silver lining. This could be the push we all need to hoist ourselves out of debt - and there's still time to get our finances in order.

 

Obviously, one way to protect yourself from future turbulence in the credit markets is to try to get into a position where you don't need so much credit. Have a look at the tips below to get away from being credit-dependent:

 

 

1. Reduce your outgoings

 

To minimise your need for credit in the future, you need to tackle the debts you have right now.

 

So, have a look at your outgoings. If you can, cut the interest payments on your debts. For example, switch your credit card debt to one offering 0% on balance transfers. This means you will stop paying interest on your existing debt, and should allow you to pay it off quicker (as long as you stop spending!).

 

Set yourself a goal - for example, to reduce your monthly outgoings by 100. Shaving money off household bills, cutting your travel costs and remortgaging your home could all be ways to achieve this.

 

 

2. The snowball effect

 

Once you've whittled down your outgoings to a minimum, snowball your remaining debts. This will help clear them as quickly, and cheaply, as possible.

 

To do this, work out which of your debts is charging the most interest. That's the one that's growing the fastest - so attack it first.

 

But before you start, remember that you need to make the minimum payments on all of your borrowings. If you have any spare cash after this, aim it at the most expensive debt. If you don't have any spare cash, make switching this expensive debt to a loan or a credit card that charges less interest a top priority.

 

When you've paid this 'nasty' off, switch your attention to the next most expensive debt. The cash 'snowballs' you throw at your debt will get larger and larger, and eventually you'll be clear of all your debt.

 

 

3. Try to up your income

 

Another good way to get out of the red is to up your income.  Even an extra 100 a month could make a big dent in your debts - and paying them off more quickly could save you hundreds, or even thousands, in interest charges.

 

 

4. Saving for a rainy day

 

After all that dealing with debt, you might think you deserve a reward. By all means enjoy yourself, but don't go spending mad!  Instead, start saving your spare cash to set up an emergency fund.

 

That way, you'll be in an excellent position to weather the predicted financial storms ahead.  Remember, you're not alone.  See the links below on this page for free impartial advice on how to deal with this growing problem.

 

 

 

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FREE DEBT ADVICE

 

National Debtline (0808 808 4000): Free confidential helpline to those in debt

Consumer Credit Counselling Service (0800 1381111): The service offers free advice and information to those affected by debt

Citizens Advice: You can find out details of your local CAB by using the website's online directory (see link on right) or by looking up its local offices in your telephone directory

 

 

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LINKS and REFERENCE

 

 

Citizens Advice Bureau

The Citizens Advice Bureau service offers free, confidential, impartial and independent advice.

You can find out details of your local CAB by using the website's online directory (see link on right) or by looking up its local offices in your telephone directory.

 

 

Consumer Credit Counselling Service

The service offers free advice and information to those affected by debt.

Consumer Credit Counselling Service
Wade House
Merrion Centre
Leeds
LS2 8NG

Tel: 0800 138 1111

 

 

National Debtline

A helpline that offers confidential and independent advice to those in debt.

National Debtline
Tricorn House
51-53 Hagley Road
Birmingham
B16 8TP

Tel: 0808 808 4000
Fax: 0121 703 6940

 

 

Advice UK

The new name for the Federation of Information and Advice Centres.

It is a large network of advice-providing organisations.

Telephone: 020 7407 4070 or visit its website.

For agencies in Northern Ireland, contact the Association of Independent Advice Centres on 028 9064 5919.

 

 

Credit reference agencies

The following agencies hold information about people's credit histories. When you apply for a loan or credit card, this information is taken into account before any deal can be approved. You can always check your credit history to make sure the information is correct, by contacting these agencies.

Experian Ltd
Consumer Help Service
P.O. Box 8000
Nottingham
NG80 7WF
08702 416 212

 

Equifax Credit Information
Credit File Advice
PO Box 1140
Bradford
B21 50S
08705 143 700

Ireland:
Irish Credit Bureau
ICB House
Newstead
Clonskeagh
Dublin 14
00 353 1 260 0388 (From UK)
01 260 0388 (From Ireland)

 

 

Information Commissioner

The commissioner is responsible for enforcing the law regarding data protection and freedom of information

Information Commissioner
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

Tel: 01625 545 745
Fax: 01625 524 510

 

 

The Insolvency Service

The service provides information for individuals and businesses affected by insolvency.

The Insolvency Service
21 Bloomsbury Street
London
WC1B 3QW

Tel: 020 7291 6895

 

 

Council of Mortgage Lenders

The CML represents the interests of mortgage lenders in the UK

Council of Mortgage Lenders
3 Savile Row
London
W1S 3PB

Tel: 020 7437 0075

 

 

Financial Ombudsman Service

the Financial Ombudsman Service provides consumers with a free, independent service for resolving disputes with financial firms

Financial Ombudsman Service
South Quay Plaza
183 Marsh Wall
London
E14 9SR

Tel: 0845 080 1800
Fax: 020 7964 1001

 

 

Financial Services Authority

The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal

The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS

Tel: 020 7066 1000

 

 

Financial Services Compensation Scheme

The FSCS may pay compensation if an authorised firm is unable to pay claims against it.

Financial Services Compensation Scheme
7th Floor
Lloyds Chambers
Portsoken Street
London
E1 8BN

Tel: 020 7892 7300 Fax: 020 7892 7301

 

 

General Insurance Standards Council

The council is the watchdog established to set, monitor and enforce standards in all areas of general insurance, including the fair treatment of customers.

General Insurance Standards Council
110 Cannon Street
London
EC4N 6EU

Tel: 020 7648 7800
Fax: 020 7648 7808

 

 

The Institute of Chartered Accountants

The Institute of Chartered Accountants is the largest professional accountancy body in Europe, with over 125,000 members.

Institute of Chartered Accountants in England & Wales
Chartered Accountants' Hall
PO Box 433
Moorgate Place
London
EC2P 2BJ

Tel: 0207 920 8100

 

 

The Institute of Chartered Accountants of Scotland

CA House
21 Haymarket Yards
Edinburgh
EH12 5BH

Tel: 0131 347 0100
Fax: 0131 347 0105

 

 

Institute of Financial Planning

The Institute is the professional body that represents those involved financial planning.

Institute of Financial Planning
Whitefriars Centre
Lewins Mead
Bristol
BS1 2NT

Tel. - 0117 945 2470
Fax - 0117 929 2214

 

 

Office of Fair Trading

The OFT protects consumer rights and ensures that business compete fairly

Office of Fair Trading
Fleetbank House
2-6 Salisbury Square
London
EC4Y 8JX

Tel: 08457 22 44 99

 

 

Consumers' Association

The Association campaigns on key issues related to consumption of goods and services

Consumers' Association
2 Marylebone Road
London
NW1 4DF

Tel: 020 7770 7000
Fax: 020 7770 7600

 

 

The Consumer Credit Association

The Consumer Credit Association represents businesses involved in the UK credit industry

Consumer Credit Association
Queens House
Queens Road
Chester
CH1 3BQ

Tel: 01244 312044

 

 

 

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