Debt Advice and Access to Credit
In the midst of the credit crunch, many people are likely to need debt advice – but some are simply more likely than others. Although today’s economic problems are having an effect on just about everyone, they’re affecting different groups of people more (or less) than others.
The Bank of England’s latest Quarterly Bulletin (Q4, 2008) provides a great deal of useful information about debt and financial problems in the UK. It even breaks that information down by group, detailing how different groups are coping with the effects of the credit crunch.
The ‘Change in credit conditions’ chart, for example, reveals the extent to which the decreased availability of credit has affected different groups of people. It breaks the population into four groups, splitting it into tenants and three different types of homeowners: outright owners, low LTV mortgagors (people whose mortgage is worth 75% or less of the value of their property) and high LTV mortgagors (people whose mortgage is worth more than 75% of the value of their property).
As you might imagine, tenants and high LTV mortgagors have been most affected by the credit crunch. With little or no equity to secure debts against, they’ve been mostly or entirely dependent on unsecured credit – which has been ‘hit’ harder by the credit crunch, in terms of availability, than secured credit. As a result, around 40% (as a net percentage) of both tenants and high LTV mortgagors reported that they’d found that credit had become harder to access.
Perhaps surprisingly, the ‘low LTV mortgagors’ group were the least affected by the reduced availability of credit – not the ‘outright owners’, as you might expect. Just under 20% of low LTV mortgagors said they’d found credit had become harder to access, while just over 20% of outright owners said they’d found credit had become harder to access. The difference wasn’t huge, but it was noticeable.
So why would people with no mortgage at all find it harder to access credit than people with low LTV mortgages? Perhaps because they don’t already have an ongoing relationship with a lender, as mortgagors have? Or perhaps because they’re statistically more likely to be retired?
Whatever the reasons, access to credit (or lack of it) can have a major impact on a household’s finances.
The right remortgage, for example, can allow a homeowner to reduce their monthly costs: by accessing a lower interest rate, for example, or consolidating their debts. If they’re coming to the end of a fixed-rate, capped or discounted mortgage, reverting to the lender’s SVR – rather than remortgaging – can, in many cases, be significantly more expensive.
Or a new credit card could give someone access to a 0% introductory offer, so they could transfer their existing credit card debt and pay no interest on it for a year or more. Having said that, most cards will charge a fee for the balance transfer itself. Plus, this isn’t a good long-term approach to debt, as it’s only postponing the problem. Unless the card holder is able to pay the debt off during that interest-free period, they’ll just have to repeat the process at the end of it – and if they can’t, they’ll have to start paying interest then.
Access to more credit is by no means the only solution to debt. In fact, in many cases it’s the wrong way to go – many borrowers need debt help of a different kind, whether it’s debt advice or a professional debt solution such as a debt management plan or IVA (Individual Voluntary Arrangement). Nonetheless, when people with debt problems can’t access the credit that might help them, it does mean their options are more restricted, and this can ‘push’ them down a path they normally wouldn’t choose.
Find more debt advice & read more about debt management & IVAs at GregoryPennington.com.