Avoiding the consumer credit trap.

Getting into debt and subsequently getting out of debt is often portrayed as equally ‘easy’ and we are fortunate (or some might say, unfortunate) to live in a time when we are offered all types of consumer credit at the blink of an eye, without the need to actively search out these products.

The focus of this article will be on credit cards and the experience I witnessed a close friend of mine encounter.

While credit cards can be a great tool if used and managed correctly – and the majority of people do so – they have also in the past been seen in a negative light. They are sometimes given to customers who have a bad or no credit history, enticing them with ‘teaser’ rates, and then after the initial honeymoon period imposing extremely high interest rates.

No one knowingly wants to get into debt, however, in some circumstances it is unavoidable. This is why it is important to understand and address any changes in your circumstances that may have an impact on your ability to service any debts that you have.

Back in the early 2000’s during a catch up, my friend mentioned to me that he had just received his first credit card; he was 19 at the time and had just started his first job. He showed me his new card with an air of excitement and pride that he had been accepted. He had been given a limit of £500, and as we spoke he was adamant that it was for “emergency use only”, as is the case for most people.

It was about 12-14 months later that he told me he had recently lost his job and that he was struggling to find another. He had started to use his credit card to facilitate wants rather than needs, none of which would be classed as emergency purchases, however with no income he felt he had no other choice, and it was easy. What surprised me at the time was that his card provider had seen him reach his £500 limit and with only repaying the minimal amount, they had increased his limit to £2000, then £3000, and finally £5000. This was without him ever requesting the increase. They had done this to ‘help him’ apparently as a way of not incurring additional fees should the interest on his balance take him over his limit (how kind!) and he had gladly accepted his new found credit limit.

Six months later his persona had changed; he was nervous, even a little scared. He told me that he had got to the point of not opening his statements or answering his home phone for fear of it being the credit company wanting to talk about his financial situation, in his words “If I don’t acknowledge it, it’s not a problem”. His attitude had to change. We talked more regularly over the following weeks and during that time he finally found work again. He had an income and could finally see a way out of this increasing debt.

The first thing he did was talk to the credit card company and explained his situation, it seems simple, right? Wrong, people in debt can often become ashamed of it and subsequently don’t want to admit they are struggling to anyone, let alone the company that they owe money to. This was the turning point for him. Not only did he realise that the company would freeze his account to stop any additional interest from being applied, but they also agreed a repayment plan based upon a budget of his income and expenditure he had provided. Within around two and a half years he had fully repaid the debt and was free from stress, anxiety, and the many sleepless nights he had previously been having.

While the above might seem extreme and over the top it is quite common and with a quick search on the web you will see various websites, blogs and videos on experiences similar to my friend’s and with others offering tips and advice on dealing with debt.

There are three tips I would suggest if you are struggling or experiencing debt.

  • First, you need to understand the extent of your debt and make a list or everyone you owe money to and how much you owe.
  • Create a budget so you can see exactly how much money you have coming in every week or month and how much money you have left over.
  • You should seek advice, firstly by explaining your situation to the credit company. If you feel they are not helping or that the solutions they are proposing are unrealistic to meet, then you should seek professional advice.

The best way to avoid debt is to stay on top of your finances, spending less than you earn. A credit card may seem like an attractive and comfortable solution in the short term, but you must think long term when making such a commitment. If only the minimum charge is being paid back each month, interest is added on and this just adds more debt to your finances – it simply becomes another loan that you owe. The best way to avoid being in debt is by being sensible, budgeting, and saving when you can for a rainy day.

 

BY DOMINIC SAVAGE