A debt trap that wrecks lives

Credit card firms and other finance companies were accused by the Citizens Advice Bureaux this week of fostering a carefree attitude to consumer debt which has prompted a big jump in the number of people with severe financial problems.

Credit card companies offering rates of interest as low as 1.9% or even 0% have also lowered the credit scores needed to obtain a card, it warns. What's more, banks, store card operators and mail order companies have in creased the levels of debt that customers can accumulate.

The result has been a jump in the number of low income families falling into financial difficulties. The National Association of Citizens Advice Bureaux (Nacab) says in a report published this week that its advisers have seen a 40% rise in the level of consumer debt problems in the past four years.

Sue Edwards, Nacab policy officer and author of the report, said credit scoring by credit card companies has been relaxed in recent years. This, combined with the readiness of lenders to extend credit limits, has led many low income families to borrow much more than they could hope to repay.

"People are getting into bigger debt. Whereas we used to deal with people with mortgage arrears or rent arrears, now they are debts connected to spending.

"Many of them find that a change in their circumstances - job loss, relationships breaking down or illness - is the main reason they can no longer pay their debts. But some people have been persuaded to extend their loans by loan consolidation companies or take on extra overdrafts by their banks," she says.

The study revealed that the average debt of people seeking assistance from CAB advisers was £10,700, in stark contrast to their average household income of £800 a month, making regular repayments almost impossible.

David Harker, Nacab chief executive, says he is concerned by findings in the report that show many consumers see further borrowing as a potential solution to debt problems. "This combined with high levels of stress and depression experienced by people in debt raises some hard questions for creditors about responsible lending," he says.

Debt consolidation companies have advertised heavily in the past year claiming they can save consumers cash if they put their debts under one roof. But they have been criticised by many MPs for charging large fees for the service which they say often increases the amount customers pay and the time they take to pay it. Debt consolidation companies are currently the subject of a review by the Office of Fair Trading.

The major high street banks say they are acutely aware of the potential for customers to build up large debts which they find it difficult to pay off. They claim that customer credit departments are instructed to give helpful advice and support to customers unable to make their monthly repayments.

They find it hard, however, to explain away the evidence in the Nacab study that thousands of bank customers who claim they cannot repay their loan are offered an overdraft. Afterwards they find themselves in even greater debt.

Malcolm Hurlston, a spokesman for the credit card companies, denied that credit card companies were at fault. He said most people made sensible borrowing decisions. He said the government's latest borrowing figures showed that repayments on credit agreements were keeping pace with borrowing.

"In most cases it is their lives that have gone wrong and not their lending," he says.

The Consumer Credit Counselling Service, a charity that offers debt advice, warns people saddled with large debts to avoid debt management companies. Rather than offering a loan directly, debt management companies charge a fee for their advice service and for arranging any extra financial support for clients. The CCCS says the financial advice they advertise is a rip-off.

It says debt management companies concentrate on selling debt management plans. Many people seen by the CCCS were unhappy with the way they were treated by these commercial firms.

The charity offers a free counselling service and says that 95% of the repayment plans it negotiates for customers are still working after six months compared to two thirds of plans arranged by others.

For more help, contact the Citizens Advice Bureau (tel: 020-7833 2181) or see local directories.

• Consumer Credit Counselling Service helpline, tel 0800 138 1111.

How to cope in the red

• Don't panic! And don't ignore the problem, it won't go away.

• Don't take out more credit - you'll only get yourself in worse trouble.

• Talk to your creditors and let them know you are having problems.

• Don't pay off the person who is shouting the loudest, but pay the most important ones like mortgage or rent; council tax; and gas and electricity. Otherwise you will be in danger of losing your home, having your gas and electricity cut off, or ending up in court and possibly prison.

• Think twice about taking out a loan to pay off all your debts. You may end up paying back a lot more than you borrowed and at very high interest rates. You may not be able to afford the repayments and the loan may be secured against your home, which you could then lose.

• Seek advice from your CAB. They will help you work out repayments and negotiate with your creditors, and also help you keep out of debt in the future.

Supplied by the National Association of Citizens Advice Bureaux.