Which description best suits you (if you have debt of course)
- "I never asked them to increase the card limit"
- "The letter said I was one phone call away from £5,000"
- "I was never any good at looking after money"
- "I never had money problems before I started using credit"
- "I was going to pay it all off when I got…"
- "I never had credit before meeting my husband (or wife)"
Any of those sound familiar? Very few people intend to get into debt, but most of us do intend to use credit. Maybe if the lender asked the question "are you any good at paying back credit?" there would be many less debt problems: if there were such a question, would we answer it truthfully? I doubt it.
There are many reasons why credit can turn to debt, and of course not all are preventable. The following three examples will give you an insight into preventable debt.
Lack of Value
Most of us that use credit are susceptible to the ‘why should I payback’ thinking; it goes something like this:
You buy a new computer on 36 months credit
| |
Notable events |
Feel good about payback |
| Purchase Day - 1 |
You do not have a computer |
105% |
| Purchase Day |
Latest spec computer |
100% |
| + 6 months |
Spec still good |
75% |
| + 12 months |
Spec superseded |
50% |
| + 18 months |
Latest software no use on your PC |
25% |
| + 24 months |
Needs repair out of warranty |
What figure would you enter? |
It is obviously nothing to do with the computer manufacturer that you feel no benefit in continued payment, but the computer’s relevance is a strong focus. With a £100,000 mortgage for your ‘dream house’ you are unlikely to feel that same resentment when meeting those payments. It is quite easy to start missing the odd payment ‘to treat yourself’ or to use the money to pay for something you value more. Using our chart above, what would happen if your new car was stolen, with a lot of damage and the insurers would not write off the car. You then had to put up with a car that had 75% repairs and in a far from new condition?
I Can Just Afford It
Taking-on a credit commitment requires fairly detailed financial planning to ensure you have sufficient funding to meet:
- The credit payment itself for three years
- Your living costs – over three years (to include inflation, and possible salary increase)
- Any future ‘necessary’ credit needs – a cooker, TV, washing machine may need replacing)
- All contingencies – new car to get to work, new roof,
It makes sense to look at these areas before committing yourself, but of course no one does. We make a quick assessment of immediate affordability, and as long as we come close to the figure we need, we go for it! We want that hi-fi, so cutting back on a few existing expenses will have to be the way to get it.
What you actually find is that the amount that you need to live on is already at breaking point. You have been creatively paying bills and creditors for a number of months before getting the hi-fi. You are spending many hours each week trying to pay your bills with what little cash you have.
Finally it hits you! You cannot pay your creditors with your income. It is at this point that you decide whom you will pay and who will have to wait. However, the creditor that you decided not to pay is the one that has issued the court papers.
One Day at a Time
When we were children we all said to ourselves, "when I get older I am going to buy…" and do we!
If only we stuck to our then dreams: biscuits, pop, toys (my pledge to myself was a bunch of ‘bananas’, sad, but true).
This article is not about psychology or how you were brought up, but there is obviously a link between them and what we want, what we can have and our action to totally ignore the affordability of ‘it’. Buying nice things, and not necessarily for ourselves, cheers us up. We can have things that would otherwise be a dream – like a new car, or even just a decent holiday.
Who’s to Blame
In a world where a diamond can cost £20 million, a footballer gets £60,000 per week and satellite television subscription can be as much as 20% of an average wage in some areas, the urge to get your little bit of something is strong.
If lenders make it possible for you to have something today that you could not buy outright, and you subsequently fail to maintain repayment for whatever reason the ‘blame’ lays... NOWHERE.
As a borrower, you should not undertake a commitment that you know you cannot afford. This does not mean that you have to know that you will always be able to pay what is due: you do not know what is round the ‘corner of life’ and if it turns out that you cannot make the repayment the lender has a responsibility to act in a human (and not business-like) way. It is not 'human' to take a consumer to court in a bid to remove their house contents by a sheriff or bailiff. Admittedly, many large lenders will not pursue such measures, but, if they then sell those debts to third party debt collectors, they will use any means available.
