Reports suggest that as the cost of credit rises and fixed mortgage deals come to an end, it is not just those on low incomes who are struggling to cope. An increasing number of households with annual incomes well above the national average, are turning to debt advisory services for help.
Community Money Advice for example, a charity that supports money advice centres in affluent areas, reported an 85% increase in people seeking help last year - including a staggering 234% increase in the prosperous area of Tunbridge Wells. Meanwhile, centres in Haywards Heath, West Sussex, and Congleton, Cheshire, have seen 500% increases in the number of enquiries they are receiving.
What has caused this crisis?
While debt used to be a taboo subject it has become a widely accepted part of many people's everyday lives. Until the onset of the credit crunch, mortgages, credit cards and loans were readily available and as a nation we have adopted a very laissez-faire attitude to borrowing.
Rising house prices resulted in people borrowing larger and larger amounts. Low mortgage and loan rates, coupled with the easy availability of interest-free credit cards, made juggling huge levels of debt manageable.
However, as a result of the credit crunch, borrowing costs have gone up and lenders have become more cautious about who they will lend to. At the same time, rising food, fuel and energy prices are putting extra pressure on families across the country and those who have over-committed themselves can no longer cope.
What can the middle class do to get their finances in order?
If you find yourself on the brink of a debt crisis there's no room for complacency - you must be prepared to be ruthless.
The first stop is to add up everything you owe and set it against your net income. Look at all your outgoings, including spending on what you might consider to be 'small items' - sandwiches and coffee at work, a beer or glass of wine after work, magazines, newspapers. These little things add up and it's staggering how many people have no idea how much they are really paying out each month.
Look for ways to save money wherever you can. You may be able to significantly reduce the amount you spend each month by cutting back on these 'small items'. And if money is particularly tight, you may even wish to sell some of your non-essential belongings at a car-boot sale or on eBay. Your priorities should be your mortgage or rent payments, followed by household bills and other debt repayments - with everything else, ask yourself if you really need to spend that money. In many instances, the answer will be no.
Check out comparison websites to ensure you have the cheapest deals available on products such as insurance, energy and broadband. It's also worth talking to your creditor about your financial situation - it may be open to negotiation particularly if you can show you are willing to draw up a budget and stick to payments. If you're struggling to meet mortgage repayments, see if your lender is willing to offer you a payment holiday while you get back on track - but bear in mind the money you owe will increase due to interest that builds up during the payment break.
Should you borrow more to ease your troubles?
As a general rule of thumb, borrowing more to get out of debt is not advisable. Certainly, if you can tackle your debts by being more frugal with your finances, it's unnecessary to increase your load by taking on another loan.
However, for some, debt consolidation is the only way to get back on track - you take out a new loan with a smaller monthly payment to pay off your existing debts. Ultimately, you will pay more as you will be paying your debt back over a longer period, and probably at a higher rate of interest - but consolidating in this way can make your payments more tolerable and mean that you can at least afford to live each month.
Loan rates have increased since the turn of the year - as outlined in last week's article 'loan costs still rising'. However, there are still some good deals available. The lowest loan rate in the UK is available from First Plus exclusively through moneysupermarket.com at 6.6%. This is a homeowner loan however, and so should only be taken if you're sure you can meet your repayments - failure to do so may lead to your home being repossessed.
If your debts are below £25,000 and you don't want to secure the loan against your property, then Barclaycard offers an appealing rate at 7.3% and Moneyback Bank is offering a rate of 7.2%. However, these rates are 'typical' which means they only have to be offered to 66% of successful applicants. The rate you are offered will depend on your credit history and only those with the best credit scores will get these low rates. You may still be accepted for a loan if your credit score is less than perfect, but the rate of interest will be higher.
It's important to take your credit score into consideration when you shop around. Obtain a copy of your credit profile and look to iron out any inaccuracies while closing any credit accounts you don't use to boost the credit available to you. Do not make applications for loan rates you won't qualify for as this will further harm your credit score - use our Smart Search tool to get an accurate evaluation of the loans you are likely to qualify for.
What other debt solutions are available?
In worst-case scenarios, it's best to contact a debt advice agency such as the Citizens Advice Bureau (CAB) and the Consumer Credit Counselling Service (CCCS) for free guidance, tailored to your circumstances.
Don't panic and bury your head in the sand - there are still solutions available to you. A debt management plan will help you work through your income and expenditure and providers will attempt to negotiate a freeze or reduction on your interest payments. Debt management can help you gain control of your finances without taking on additional lending. Debt management providers can be expensive - usually their fees range from 15-17.5% of your monthly payments - but could be worthwhile to help you get back on track. Think Money is one of the most well-established providers in this area.
Alternatively, individual voluntary arrangements (IVAs) can be a solution to those who have a debt problem that they can't realistically repay or service. An IVA is basically a formal agreement between you and your creditors and is set up through the county courts. It enables you to repay your debt at an affordable rate over a set period of time - normally five years. At the end of the term, any outstanding debt should be written off. IVAs should not be taken out lightly as your credit rating will be affected, so read the guides in our debt solutions section before deciding on the right course of action for you.
Have your say: Are you having debt problems? Or maybe you were in financial difficulty and can offer advice to others. Visit our forum where you may be able to give or receive help from other members.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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