Sorting out the finances should be near the top of every list of new year resolutions.
Few people can honestly say they could not do better.And with the recession still hurting, the cold weather forcing up heating bills and many shoppers spending more than they could afford at Christmas, this is the time to begin the task.
But beware easy solutions to difficult problems. So-called ‘payday loans' are a tempting way of balancing the books because they are easy to obtain. They are also extremely expensive. Take ‘QuickQuid' – which is currently advertising heavily on television. It promises “fast and convenient cash advance services”. Yet with a charge of £10 to £14.75 for a short-term £50 loan, the APR (actual percentage rate) is an astonishing 2,356%! Another potential trap is the unsolicited phonecall from someone claiming to represent a debt management company. Trading standards officers from the Department of Enterprise, Trade and Investment recently issued a warning about practitioners who falsely claim to be experts on consumer credit agreements.
“They claim that many of these agreements are completely unenforceable, leading the consumer to believe their debts can be cancelled and that they may be able to claim back thousands of pounds,” explained Damien Doherty of the Trading Standards Service. “Consumers who agree to avail of such services are then asked to pay large up-front fees, often up to £500, so the company can review their credit agreements.
“In reality, many of the claims are exaggerated and there is only limited evidence of success, when consumers have received money back. Many consumers who have been affected by these scams say that they were led to believe that the debt elimination business contacting them was doing so as part of a government initiative to get people out of debt. They also say that they were subjected to high pressure cold calling from call centres and encouraged to make an on-the-spot decision.”
Mr Doherty warned that in many cases, people have been asked to make downpayments of hundreds of pounds on the false promise that the debt elimination agencies could get credit agreements cancelled and the debt written-off.
Not only is the outcome unlikely, but the agency may not be around long to process the claim. Mr Doherty reported that one consumer paid £1,500 to an agency that then ceased trading.
Even apparently legitimate debt management companies may not have the best interests of their clients at heart. One agency recently claimed its rivals were over-charging by as much as £3,000 for services.
Targeted by criminals
Another warning has been issued by consumer credit reference agency Equifax. Some of the cold callers offering debt management services, it claims, are actually criminals seeking personal financial information – including bank account details – in order to carry out a fraud. “Criminals are targeting those already in debt and promising them lump sum payments as a way of tricking them out of valuable account details and upfront payments,” explained Neil Munroe, external affairs director of Equifax.
Any bona fide agency would not seek personal details over the phone in this way, said Mr Munroe. With this information, the fraudster empties the victim's bank account.
It is not only the criminals that consumers should be wary of: legitimate banks also earn money from customers' naivety.
One consumer wrote to me last month outraged that his credit card company was applying repayments to pay-off the cheapest debt first (which can be the interest-free balance transfers, or initial interest-free purchases), leaving the most expensive card debt outstanding.
Sadly this is common practice in the credit card trade – though it will be outlawed if government proposals are enacted to regulate the way that card repayments are applied. A survey just conducted for the Nationwide Building Society found that 63% of consumers did not understand the way that repayments are applied by their credit card issuer.
The Nationwide had reason to highlight the survey response, of course – it is the only large financial institution that allocates card account payments to repay the most expensive debt first.
Typically, the most expensive debt is one of the most enticing – cash withdrawals on a credit card. These should always be avoided if at all possible.
Even if the card account is fully paid-off every month, it will, on average, cost £5.46 to withdraw £200 on a credit card. If the withdrawal is not cleared for a year, the APR charged is a hefty 25.37%, according to recent analysis by MoneyExpert.com.
As the Christmas and new year holiday draws to a close, it will leave many consumers nursing bad financial hangovers.
The sensible solution is to approach a legitimate and trusted advisor to seek help.
There are consumer advice bureaux across Northern Ireland – see w ww.citizensadvice.co.uk/ for details of your nearest office – and advice4debtNI is funded by the Northern Ireland Executive to provide assistance. These are good places to start to put yourself on the road to financial recovery.