AS THE full impact of the credit crunch continues to affect more areas of the economy, it is clear that lenders are trying to increase the amount of money they make from each customer.
Credit card providers, in particular, have dramatically increased the cost of the cards they issue. According to one financial website, almost one in three credit card holders has experienced an increase in interest rates over the past year, some s
ubstantial.
For example, the average rate charged on credit card cash withdrawals has been steadily increasing since November 2006. It has risen from 21.27 per cent at that time to 23.7 per cent in June 2007 and 25.3 per cent today. It would appear that lenders are attempting to increase their profits on the very customers who may be most in debt.
Of course, using your credit card to get cash is never a good idea, but it is a temptation to which the most indebted are likely to succumb at the moment of greatest need. But if individuals are ever to escape their indebtedness and prevent it from getting worse, there are a number of strategies which can reduce and ultimately eliminate debts.
Firstly, credit cards are a definite no. Only in absolute emergencies and at the point when you really have no options should you be using any form of credit which can have an interest rate of 25 per cent. Borrowing £5,000 at this level of interest results in an annual interest charge of £1,250, plus the charges which are levied for taking cash out which can be around the 3 per cent mark, resulting in an additional one-off cost of £150 just to withdraw the money. That means that you would need to pay just under £27 per week just to cover the interest and charges on this kind of transaction.
Therefore, discarding your cards and removing any dependency on credit is the first step to financial freedom. You also need to examine how much you are paying in monthly interest and see if you can change to an interest-free card (which must not be used to increase your debt) or to a lower interest loan.
Tackling indebtedness is as much about your state of mind and your desire to be debt free as it is about reducing debt. Too many people simply become used to paying a set amount of money per month just to have their finances remain static. But credit card debt rarely falls quickly so you must adopt a strategy to reduce it quickly.
One method is to look at all of your debts and find the one that is costing the most to service. The "snowball method" encourages you to target the costliest debt and pay a fixed amount against that each month while paying the minimum to your other debts. By paying as much as you can to the most costly debt, your liabilities are reduced more quickly and eventually the most expensive debt is wiped out. You then transfer the money you were paying to the first card to your next debt and pay a fixed amount above the minimum on that and you will find the debts will disappear.
Unfortunately rising utility bills, decreasing levels of real earnings and higher food costs are forcing many individuals to abandon the long-term goal of debt reduction in favour of the short-term need to heat, live and feed themselves. But this is not a counsel of despair and people should know that debts need to be paid and that credit is not cash and never should be. The current economic climate has, unfortunately, forced many individuals to have to face up to this reality sooner rather than later, but the long-term benefits of this may be that we are not such a credit reliant society in the future.
• Bryan Jackson is a corporate recovery partner with accountants and business advisers PKF (UK) LLP
