Preparation key to avoiding Christmas debt

Financial solutions company Think Money have warned consumers to be careful over the amount of debt they incur over the festive season, in order to avoid potential debt problems in the midst of an economic recession.

They have also advised those consumers who do rely on credit to act early and tackle any debts before they have the chance to grow, and to be selective over the types of credit used in order to prevent the debts from becoming unmanageable.

For many families in the UK, including those who are usually comfortable financially, the Christmas season has become associated with debt. The tradition of spending large amounts of money on food and gifts has meant that large numbers of households fall into debt every year, even if it means spending a large part of the following year repaying those debts.

Indeed, a survey taken earlier this year by Savebuckets.com suggested that one in four Christmas borrowers were still repaying their Christmas debts in the following October – nine months after the money was originally spent.

A debt expert for financial solutions company Think Money commented: “In today’s society, many households actually expect to get into debt in order to get through the Christmas season – which can put them at risk of debt problems in the future. It’s much safer to focus more on how to avoid falling into debt – and with the right preparation and attitude, it is very much possible to do that.”

The spokesperson added that staying out of debt over the Christmas period does not necessarily have to mean cutting back on costs. “The households who are best prepared for the Christmas period are those who have thought about it long in advance and have been saving throughout the year. By saving just a relatively small amount each month, it’s quite possible to save enough to cover all the costs involved, without having to compromise.

“However, it seems that it is currently more common to pay with credit in the run-up to Christmas. This may have been fuelled by the relatively easy access to credit of the past few years, although due to the credit crunch, this may be a little more difficult this year.”

The spokesperson also said that the type of credit used can be crucial to consumers’ ability to repay the debt. “For those consumers who do rely on credit over the Christmas period, choosing the right form of credit is a simple step that can make all the difference.

“For example, it’s generally unadvisable to make large purchases on credit cards unless the buyer is absolutely sure they will be able to repay the debt in a short space of time. The APR on credit cards is typically very high, which means the debt can grow very quickly unless it is repaid promptly.

The Think Money spokesperson added that anyone finding themselves struggling with debt should seek debt advice straight away. “There are a number of debt solutions that can help to minimise outgoings and/or help to reduce debts, such as debt consolidation or an IVA (Individual Voluntary Arrangement). We urge anyone in serious debt to seek professional debt advice as soon as possible.”

Young people should act on debt early

Following a study suggesting that the 18-34 age group are most at risk from the credit crunch, with many carrying significant debts, financial solutions company Think Money have advised people in this age group to take extra care with their finances as the prospect of a recession looms.

Furthermore, they added that debt problems are just as serious for people of any age, and should always be addressed as soon as they start.

The study, carried out by think tank Reform and the Chartered Insurance Institute, claimed that many 18 to 34-year-olds had so far experienced a “uniquely gilded life” which had given them a “false sense of security”.

As a result, they have “run up huge credit card bills, smashed their piggy banks and are now staring at a broken housing ladder”, the report claims.

The report dubs the age group the “IPOD (Insecure, Pressurised, Over-taxed and Debt-Ridden) generation”, and claims that one in five such people carry debts of £10,000 or more, while one in three have no savings.

The overall situation leaves the IPOD generation particularly vulnerable to the current state of the economy, with the report stating that they “have the raw skills to understand their position and the dawning sense of responsibility to do something about it (…) However they are hamstrung by a financial establishment determined to service the old and patronise the young.”

A spokesperson for Think Money said: “It may well be the case that many of the large numbers of younger people getting into debt do so because of a diminished sense of responsibility, brought on by comfortable living conditions and, until recently, relatively easy access to credit.

“But with the credit crunch ongoing and a recession becoming a very real possibility, a lot of younger people may be about to experience the kind of struggles that instilled an “instinctive fear”, as the report puts it, into people from previous generations.

“Whatever the reason, in the current economic climate, it’s more important than ever for people to tackle their debts now. Especially with high-APR debts such as credit cards, it’s essential that those debts aren’t allowed to grow.

“There are a number of debt solutions designed to help people in different financial situations.

“For people with a number of smaller debts, a debt consolidation loan could help. A debt consolidation loan involves taking out a new loan to pay off all your existing debts, meaning you only have to repay one creditor instead of many. The interest rate is often smaller than your original debts, especially if you are paying off high-APR debts such as credit cards – although if you choose to lower your monthly payments by spreading them out over a longer period, this will incur more interest which could cancel out the benefit of a lower overall rate of interest.

“If you have a number of debts that you are struggling to repay, a debt management plan might be a better option. This involves speaking to a debt adviser, who will discuss your financial situation in confidence, and will then negotiate with your creditors to agree repayments based on how much you can afford each month. In many cases, interest and other charges can be frozen, reducing the total amount you have to pay.

“If you have more serious debts of over £15,000, an IVA (Individual Voluntary Arrangement) could get you debt-free in five years. An IVA involves making regular monthly payments to your creditors based on the amount you can afford to repay, and after the five-year period your remaining debt will be considered settled.

“However, be aware that an IVA requires approval from creditors holding a total of at least 75% of your debts before it can go ahead, and you may be required to withdraw some of the equity in your home in the fourth year of your IVA.

“Debt affects people of all ages, so we urge anybody struggling with debt to seek expert debt advice as soon as possible.”

Think Money (www.thinkmoney.com) are a financial solutions company based in Salford Quays, Manchester. They specialise in a wide range of debt advice and solutions, including debt management plans, debt consolidation, IVAs (Individual Voluntary Arrangements) and bankruptcy advice.

Debt advice in the face of a recession

The deteriorating state of the economy should lead borrowers to review their finances as a matter of urgency, say debt experts Debt Advisers Direct, following the Autumn forecast from the Ernst & Young ITEM Club.

“Released on 20th October, the Ernst & Young ITEM Club Autumn forecast ‘sees an economy that has deteriorated dramatically in the last quarter and is now in recession’,” said a spokesperson for Debt Advisers Direct. “The good news, however, is that the recession is expected to be both short and shallow, with GDP rising – even if only by 1% – in 2010.”

“Even so, the impact of today’s economic downturn will be profound,” the spokesperson continued. “By definition, even a ‘shallow’ recession involves a shrinking of the nation’s economy, with the inevitable consequences: lower spending, higher unemployment, greater uncertainty about the future, etc.

“On an individual level, the threat of a reduced monthly income is likely to lead many to review their financial situation. This isn’t to say that economic gloom is a good thing, but everyone needs to stop and take stock of their finances from time to time, and reports such as this can provide a much-needed incentive to do so.

“It’s important for everyone – even people with no debts and significant savings – but for the millions of UK consumers in debt, it’s particularly vital. Many people in the UK have grown used to spending more and more of their monthly budget on debt repayments. In many cases, those repayments take up almost their entire disposable income, so if anything happens to their income, they could almost immediately face a whole range of consequences, from legal action to bailiffs and County Court Judgments (CCJs) – to say nothing of the damage to their credit rating.

“The important thing, of course, is to take action before it’s too late. Seeking professional debt advice is normally the best way to start – any borrower could have a wide range of debt solutions available to them, so it’s vital they talk to a professional organisation which understands every option and can provide impartial debt advice, tailored to their individual circumstances.”

An Individual Voluntary Arrangement (IVA) or debt consolidation loan, for example, could help someone cope with a reduced income – yet neither debt solution would make sense for someone who’s fairly sure they might lose their income (or a significant part of it) in the near future.

“A borrower who is working, but whose job seems to be at risk, may be better off with a flexible debt solution such as a debt management plan: if their income drops, they can ask a professional debt management company to talk to their creditors on their behalf, renegotiating their debt repayments as and when it becomes necessary.”

Different borrowers, in other words, will need to adopt different strategies to deal with their debts. “There’s no ‘silver bullet’ for debt. Debt management plans, debt consolidation loans, debt consolidation remortgages, IVAs, even bankruptcy – each has its place, but the debt solution that’s right for one person can be completely inappropriate for another. The key thing is to take the time to get the right debt advice before making any commitments.”

Website: http://www.debtadvisersdirect.co.uk/