Middle-classes hit by debt crisis
Seemingly affluent households are increasingly seeking debt advice as the credit crunch hits middle-England, debt organisations have reported.
Transact, a network of over a thousand debt and financial inclusion organisations, says middle-class households who took advantage of the glut of cheap credit over the past few years are now feeling the pain of price hikes.
People who took out cheap mortgage deals two years ago are suffering from payment shock while those looking for personal loans and credit cards are being stung by higher interest rates and charges.
Transact says it saw an 85% increase in people seeking financial help in 2007, with a massive 234% increase in the affluent area of Tunbridge Wells.
It reports that one of its members, Community Money Advice in the traditionally middle-class town of Haywards Heath, has had to close its doors to new cases because of a dramatic increase in demand.
“We are seeing a new type of client. Teachers, police and banking and service sector workers, many of them homeowners, are struggling with mortgages, secured loans, and credit card debts,” says Heather Keats, director of Community Money Advice.
She adds: “They were already financially stretched but have been pushed over the edge by dearer credit and big increases in food and utility costs.”
Another Transact member, Meridian Money Advice in Greenwich – where the average property price was £279,565 in March 2008 – claims many people seeking advice got into trouble because they borrowed “cheap money” simply because they could.
Chris Tapp, from debt charity Credit Action, says: “The whole face of the debt problem is getting uglier. We are dealing with many more mortgage problems and repossession hearings which are more complicated and take far longer to deal with than other credit issues.”
There are now real concerns that charities and other debt organisations may not be able to cope with the increase in demand.
“The need for free debt advice has always outstripped supply, but it’s hard to see how services that are already seriously overstretched will cope with this extra demand,” says Transact’s Faith Reynolds.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.