FOOL'S EYE VIEW
Ditch That Debt Before It's Too Late

By Jane Mack (TMFJane)
January 30, 2003

The Government has invented a new word for people who are too much in debt. Overindebtedness. And, no, it's not in the dictionary, so it's bound to have been a self-important civil servant who came up with it.

But the fact is it's quite likely to become a recognised word in the English language if the Government doesn't do something to ram it home to people that it's time to get a grip on their finances.

Admittedly the Government is trying although I wish they'd take action instead of publishing endless reports on the subject. Along with their current review of Consumer Credit Act, two and a half years ago they set up a special Debt Task Force to examine the extent of debt in the UK and to make recommendations. Their Second Report of the Task Force on Tackling Overindebtedness has been published today. To my mind it doesn't say much more than their first report which was essentially that debt is a growing problem, consumers need to learn more about responsible borrowing, and that lenders should be more conscientious about who they lend to so that people don't get into trouble.

However, the research behind the report serves as a useful reminder of the warning signs. According to a survey they carried out about 20% of people were in financial difficulties. The main cause was loss of income (mainly from job loss) although this was strongly associated with setting up home, having a family and relationship breakdown. These are all things that each and every one of us could face.

The Task Force's main concern is that while our general tendency to borrow more these days currently causes problems for a relative minority, a far greater number of people would be at risk in an economic downturn or following an increase in interest rates. Interest rates may well be the lowest they've been for 50 years but I think we're all aware by now that world economies have suffered considerably since September 11th. Our own stock market is at its lowest for several years and there is concern that our economy is only being kept afloat because of consumer spending. And, without sounding overly dramatic, we're on the verge of war.

The research identified that those with a high risk of getting into financial difficulties were people who:

• had four or more outstanding credit commitments
• spent more than 25% of gross income on consumer credit or
• spent more than 50% of gross income on consumer credit and mortgages.

At least 7% of households were in one or more of these categories, which amounts to around 1.7 million families. It'll take you less than half an hour to work out if you're one of them and, if you are, regard it as a warning shot and do something about it before it's too late.

Needless to say, the industry comes in for some criticism. The Task Force is rather disapproving of lenders who offer pre-approved loans, send unsolicited credit card cheques and make unsolicited increases in overdraft or credit card limits without making appropriate checks to ensure that the recipients are not already in financial difficulty.

Those who sell payment protection insurance (PPI) should make sure that the terms and conditions of the insurance are transparent to consumers and, in particular, that it's not sold to consumers who aren't actually eligible under the terms of the policy.

And where consumers transfer unsecured borrowing to a secured loan there should be a clear warning on the agreement that the home may be repossessed if repayments are not kept up.

This last point is a particularly important one because I think it's something consumers don't really consider – at least not until it's too late. The Task Force seems to be working on the idea of some sort of leaflet to educate consumers about the sort of questions they should ask themselves when taking on any form of credit but I can't help feeling a regular television campaign would be more effective.

I think they should run an annual series of adverts on television (similar to the drink/drive campaign) that warns of debt and teaches something each time. Can you just imagine a stern voice emanating from the telly saying something like:

"Did you know that when lenders say your home is at risk if you don't keep up repayments, they really mean it? June Glover from Leeds had her house repossessed after..."

And, yes, these adverts should follow all those other ones that claim to help you 'clear your debts' by persuading you to borrow more money!

> Find out how to Get Out of Debt