WITH total debts of about £230,000 – made up of £60,000 on 13 credit cards,
£50,000 in three personal loans and a £120,000 mortgage – Anthony and Andrea
Johnson were in an impossible position and needed to act fast.
The couple began to struggle after Andrea, 39, had to reduce the hours she
worked because she fell pregnant, which resulted in the couple losing about
£15,000 a year in income. They reached a point where they were paying out a
total of £3,000 a month – more than they had coming in – just to keep their
heads above water. But they were simply juggling their debt from one card to
another, watching the deficit grow ever larger. Anthony says: “That was the
turning point. We could not absolve ourselves of our responsibilities, and
that put the pressure on. We were juggling debt to pay other debt for about
three years.”
The couple are far from being alone. With Britain’s debt now at more than
£1,300 billion and half of all credit-card applications being rejected as
banks worry increasingly about the credit crunch, many people will be
familiar with the pattern. Plenty of others who are not in their position
just yet may soon find themselves there if they fail to act.
In April Anthony, 29, a facilities manager, and Andrea, a part-time veterinary
nurse, contacted The Times for advice on how to reduce the debt. We
asked several financial advisers to help the couple to tackle their problems
and all made it clear that they needed to address immediately the “serious
situation” in which they had found themselves.
Anna Bowes, of AWD Chase de Vere, the independent financial adviser (IFA),
says: “One of the first things that they needed to do was to draw up a
detailed and accurate list of their income and outgoings so that, however
hard it was to look at, they understood how their problems were escalating.
“Understandably, as they were getting into deeper and deeper debt, they were
trying to ignore the cost of paying for it. By quoting the monthly interest,
it made the interest look far less onerous, but the average annual
percentage rate (APR) was actually 17.6 per cent. Looking at the credit card
debts alone, for instance, if they paid off a minimum of 2.75 per cent a
month, it would have taken about 40 years to clear the debt.”
Philippa Gee, of Torquil Clark, another IFA, felt that the situation was so
serious that the couple would have had to declare themselves bankrupt if
they did not act quickly. She advised them to “cut all possible expenses,
even pension contributions”, something that others in a similar position may
be wise to heed. She adds: “Anthony and Andrea also needed to look at all
the essential bills to see where they could save money.”
The financial tightrope that the couple were walking could “cripple the family
for a very long time”, said Ms Gee, who advised the couple to write to every
lender with a proposal to suspend payments for a limited period of time, or
at least to reduce them to the bare minimum payment.
Lisa Colclough, of Citizens Advice, says: “The couple were not in default, so
they did not have a bad credit rating. But they needed to work out what they
could afford to pay towards their debts and create a budget detailing what
was coming in and what were their essential outgoings. These are things such
as the mortgage payments, food, travel and clothing – basically what they
need to live.”
Anthony and Andrea decided to go to the National Debt Helpline for advice.
Anthony says: “They asked us to draw up a budget of what we were spending,
and from that we formed an overall picture of what was going on. We were
able to see what was a critical expense and what was not.”
The Johnsons, with help from the National Debt Helpline, wrote to their
creditors to explain the situation. Both MBNA and Virgin responded by
suspending interest on their card repayments. The Johnsons were put on a
debt-management plan with Payplan and are now paying a much more manageable
£180 a month to clear their nonmortgage debts, which alone amounted to about
£110,000.
Anthony says: “That will go to our creditors for the next 54 years. We did
think about an individual voluntary arrangement [a legally binding agreement
between a borrower and his or her creditors], but we were worried that we
would risk losing the house if we did that.”
The couple say that going through this process of confronting their debts has
helped them to improve the management of their finances. Anthony says: “We
run a lot tighter budgets now. We were reckless with our money before, but
now we are careful about simple things, such as mileage on the car. There is
a certain sense of relief because things have been made a lot easier.”
Andrea adds: “We are glad we did this before the credit crunch started to
bite. It has changed how we live day-to-day. We are not getting as much
hassle from lenders and we are not arguing about money now.”
The credit-card crunch
CREDIT CARD companies are turning down almost half of all applications.
Figures from Moneyexpert.com, the comparison website, indicate that the
number of refusals rose 17 per cent, to 3.27 million in the past six months,
with those aged between 25 and 34 most likely to be spurned.
Meanwhile, those granted a card are paying higher rates and charges – with 125
fee and rate increases reported in the past two months.
Readers debated the news at Times Online. Dawn, of Saffron Walden, was one of
many to welcome the lenders’ caution. “This is brilliant,” she wrote.
“Credit has been too easy for years. If you can’t afford to buy something,
then save for it. Don’t put it on a card.”
Alistair, of Wolverhampton, agreed: “It’s good to see the card companies are
showing restraint and making it harder for people to borrow on plastic.”
The Johnsons’ financial CV
Jobs: Anthony is a facility supervisor, dealing with the post room and
printing contracts for a retail company. Andrea is a part-time veterinary
nurse.
Earnings: Anthony earns £25,000 a year. Andrea is on £9.80 an hour,
with her working hours varying considerably from week to week.
Current account: Lloyds TSB Gold Account (£1,500 into a £2,000 agreed
overdraft).
Savings: None.
Mortgage: £120,921 with Abbey at 4.79 per cent, but the fixed rate
expires in February.
Pensions: Anthony pays £90 a month into a Friends Provident company
scheme. His fund is worth £13,372. Andrea has a £3,000 fund with Phoenix
from a previous employer and a private pension fund, also with Phoenix, into
which she was paying £75 a month. She has now stopped paying into this
pension and is using the money to help with the family’s debt repayments.
Loans: £2,244 (Egg, at 12.23 per cent for three years, ending 2008);
£23,763 (Egg, at 6.73 per cent for seven years, ending 2012; £25,000 (Lloyds
TSB, at 7.9 per cent for seven years, ending 2011. Severe penalties if paid
off early).
Credit cards: £9,952 (Lloyds Trustcard Platinum, 16.9 per cent);
£4,000 (Lloyds Platinum Mastercard, 20.44 per cent); £962 (Lloyds Gold Card,
15.94 per cent); £1,265 (Mint, 18.94 per cent); £4,792 (Tesco, 16.95 per
cent); £3,532 (Sky, 16.95 per cent); £9,566 (Virgin, 13.95 per cent); £2,945
(MBNA, 23.95 per cent); £5,031 (Barclaycard, 17.95 per cent); £4,000
(Marbles, 15.9 per cent); £5,264 (Egg Green, 17.9 per cent); £4,839 and
£1,646 (on two Egg Blue cards, both 16.9 per cent).
