In the wake of the official Insolvency Service statistics for the first quarter of 2008, Insolvency Practitioners have complained that they are not nearly comprehensive enough and so misrepresent the true state of personal debt in this country. Melanie Giles, IP and IVA.co.uk forum expert, has commented that: “Given that the Insolvency Service statistics only focus on formal appointments, i.e. bankruptcies and IVAs, the ongoing trend of consumer indebtedness is not being appropriately represented – the number of people entering into debt management programmes is actually growing at a faster rate.”

This has long been a problem in the personal debt and insolvency industry. Certain sectors are subject to strict scrutiny and are tightly legally controlled, while others inhabit a legal grey area and are more difficult to control and regulate. The IVA industry has numerous laws that are applied to it, and it is very closely monitored. An IVA is a legal contract between and debtor and his or her creditors which must be respected and followed closely.

Debt Management Plans and other informal debt solutions are not so well monitored or legally binding. Statistics are not published about who is on them, how much they owe, what their rate of success is, and so on and so forth. This does not mean that Debt Management Plans are necessarily problematic, it just means that they are harder to monitor and, potentially, easier to offer poor service on without getting caught out.

The downturn in IVAs is suspected to have driven many debtors into Debt Management Plans. Given that there is no write off of debt, many of these plans can potentially last ten years or longer. It is highly unlikely that a debtor will be able to maintain payments for this length of time or resist the temptation of taking out further credit, and this is likely to eventually lead to bankruptcy. If debtors continue to turn to unregulated Debt Management Plans, we won’t have a full idea of the personal debt crisis in the UK until it is too late.

Personal debt in the UK continues to rise, the latest statistics show, with borrowing rising by over £9 billion in March alone. Personal debt has risen from £1,421 billion to £1,430 billion, rising at a rate of roughly £1 million every five minutes. The average household in the UK now owes over £50,000 in secured and unsecured lending, and each individual adult on average owes over £30,000.

That debt continues to rise is unsurprising. Fewer sources of credit are now available, but there is still plenty of money that is there to be borrowed, and plenty of people who want or need to borrow it.  But debt is getting more expensive every week – since the credit crunch hit, the cost of borrowing has risen considerably. Mortgages, credit cards and personal loans have all seen significant interest rate rises in the past few months, and the more that people borrow, the more the interest is going to pile up.

 The rise in debt during March is not exceptional. It is simply the same steady increase that has been seen in recent months, and does not show that borrowing is either slowing down or spiralling out of control. But because borrowing is starting to cost much more than it did, if the increased interest rates starts to be felt, it could snowball considerably. £93 billion was paid in interest alone by consumers over the past twelve months – in the next year, with interest rates spiralling up, this figure could be much, much higher, unless consumers can manage their debts and avoid being caught out.

There is little to do but play the waiting game to see which way the statistics go next month, and the month after that, to see how the pattern develops over time and whether or not the UK’s debt mountain is likely to shrink or grow in the months ahead.

IVAs are on the rise again, the latest quarterly statistics from the Insolvency Service reveal, up 4.3% compared to the previous quarter to 9,614. Bankruptcies also rose marginally, up 0.1% to 15,651. These increases are not surprising. Most insolvency experts have long been suspicious of the downturn in IVAs that occurred at the end of last year, particularly against a backdrop of spiralling personal debt. Most agreed that it was not due to falling demand, but instead down to the increased rejection rate of IVAs. As the cost of living rises and house prices tumble, it would be very strange if personal insolvencies had not risen accordingly.

That IVAs have begun to increase in number is of little surprise, given the almost apocalyptic predictions for personal insolvencies this year. Indeed, what is more surprising is how little they have increased, relatively speaking. Just over 25,000 people went insolvent in the first quarter. If the trend continues, over 100,000 will be insolvent by the end of the year, but this is nowhere near the 130,000 predicted by KPMG. This may well be the calm before the storm, of course, if there is a surge in solvency later on this year, but it has not happened just yet.

It is important to keep the changes in perspective. While IVAs have increased by 4.3% compared to the previous quarter, they are still down a massive 22% compared to the same time last year. We are nowhere near an insolvency crisis just yet, as we are not even up to the number of IVAs being taken out at the beginning of last year, when the economy was booming. And, strangely enough, it is good to see that IVAs are being approved again. Whether or not this is due to seriously increased demand or down to the code of practice agreed by banks and IPs earlier this year, it isn’t known. But this increase in insolvencies, small as it is, is a warning sign, and could be an indication of more serious problems to come in the year ahead.

Personal loan interest rates have steadily crept up recently, as lenders seek to reclaim their losses from ordinary debtors. Numerous changes have occurred in the past fortnight; Barclaycard have raised their loans by 0.5% and Natwest by 2.5% in this period of time. Some interest rises are much more extreme, with loans from Black Horse jumping by 11% in some cases.

It’s unsurprising that these changes have occurred, particularly in the wake of the credit card interest increases that have been going on since the credit crunch started. Perhaps, given the ruling on unfair bank charges that the OFT has made, the banks are anticipating mass payouts to consumers in the next few months. The banks are trying to protect themselves and maximise their profits in the wake of some substantial profits. The days of cheap borrowing are over – maybe temporarily, maybe for the foreseeable future. While these rises will hurt debtors, at least they are straightforward interest hikes. The number fiddling and hidden charges that have been brought in on a range of credit cards are much more likely to catch debtors unawares.

Those who considering taking out a personal loan to shore up their finances are advised to research thoroughly before taking a loan out. Some good deals are still out there, but it is important to remember that interest rates are typically more punishing for the smaller loans than for the larger ones – a loan of £1000 from Black Horse has a 27.9% interest rate, whereas a £7500 over five years has a 16.9% rate of interest. Of course, there’s no reason to get a bigger loan than you need just to get a better rate of interest and Payment Protection Insurance is usually best left well alone. It’s regarded as one of the poorest forms of insurance that can be taken out, with the banks offering PPI that is particularly poor value for money. Any loan that is taken out needs to be affordable, and with a clear repayment plan in place.

Debt is straining the fabric of our society – so says the Archbishop of Canterbury Rowan Williams in a speech made last Thursday. Painting a grim picture of life in today’s Britain, the Archbishop attacked all those who make a profit out of debt and highlighted the hardships of the indebted. The speech was delivered to the House of Lords, and can be read in full here.

The Archbishop was particularly critical of doorstep lenders and loan sharks who charge exorbitant rates of interest to those who have been refused by highstreet lenders, and also criticised the growing divide between the super rich and the poor. Dr Williams warned that an “economy built on spiralling, more or less uncontrolled, credit” is leading to “the erosion of family life and the erosion of self-confidence” for many people.

It is a timely address. Previously, the Church of England has shown a concern for debt, setting up a webpage dedicated to debt relief, and it is good to hear debt being taken seriously by a national institution. Most of the comment on the credit crunch and house market troubles has been on the bigger picture – the state of the economy, the future of the financial industry and so on. Worthy concerns, to be sure, but of equal or greater importance is the plight of the many ordinary people who struggle under the practical and physiological pressure of chronic debt.

The Archbishop had some deeply concerning things to say on this last point, saying that his charity workers had discovered that 1 in 3 heavily indebted people has seriously considered suicide. It is hard to understand the pressure that heavy debt brings until you have actually felt it. Thankfully, Dr Williams is making an effort to understand, and is determined to help the nation work towards a solution.

It feels as though the battle over bank charges has been going on forever, but now it seems it may be coming to an end – or at least, the beginning of the end. The Office of Fair Trading has won the first round of its legal battle with the high street banks, as on Thursday, a judge ruled that the OFT has the right to rule on the issue, paving the way for one or more high court decisions as to whether or not the overdraft and late payment charges have been fair, and how much will have to be repaid to consumers. If the OFT case is successful, a cap will be placed on overdraft and late payment charges, and billions of pounds worth of charges may be paid back to members of the public.

Bank charges are big business for banks. It is estimated that the banks collectively receive £3.5 billion from the charges every year. That’s over £10 million a day. The charges can go as high as £39 for a bounced cheque or missed direct debit, when the actual administration cost is estimated at £2 for each instance. Reclaiming the charges can bring a few hundred pounds back to consumers, or much much more – one Norfolk businessman reportedly claimed back over £35,000 last year.

Anyone who feels they have a case to make should send a template letter (many of these are available on the internet) to their bank, and should be aware that there is a time limit on making claims – you cannot claim back charges that are over six years old. But those who are hoping to claim back their charges will have to keep waiting for a while. The ‘freeze’ on repayments, imposed last year, still applies for the time being. It may be a long time before a decision is reached, and there may well be a lengthy appeals process. But the case has made it past the first step at the very least, giving hope to many.

The British Banking Association (BBA) statistics are in for mortgages and unsecured lending in March, and they make for interesting reading. After the massive surge of borrowing in February, which saw the biggest monthly increase in unsecured borrowing in five years, it seems that either people have become more conservative or lenders have become more cautious – perhaps it is a little bit of both.

For credit cards, in March people actually paid off marginally more then they borrowed, with £7.4 billion being taken out and £7.5 billion of credit card debt paid off. Every silver lining has its cloud, however – despite these figures, due to interest and charges net credit borrowing still increased by £300 million. About £2.7 billion was taken out in loans, which is similar to previous months, and overdraft borrowing increased slightly. Overall, a quieter month compared to the February surge in borrowing.

Remarkably, March also saw the biggest increase in savings in a long time, with over £2.9 billion being invested in savings compared to the monthly average of £1.9 billion. Perhaps in anticipation of troubles ahead, people are banking as much as they can into savings whilst they still have the chance. Whatever the reason, bigger savings will provide many with the safety net to survive the uncertain future.

While March saw a significant boost in savings, mortgage rejection rates climbed to 46%, as the housing market worsens and new and existing homeowners struggle to secure new mortgages.

These statistics are only averages, and debtors experiences are will always be individual. It may be that it is the best off in the country who are responsible for the surge in savings rather than those who are truly struggling. Equally, the fact that borrowing has decreased may have more to do with banks rejecting customers than debtors growing more cautious. But the figures seem to suggest increased consumer caution in the face of anticipated problems, and it can only be a good thing that can only be a good thing as the economy remains unstable, and many ordinary families struggle to make ends meet.

An eye-catching statistic that has cropped up over the past few days is that an estimated 18,000 credit card applications are being rejected every day. 3.24 million credit card applications have been rejected in the last six months, as wary lenders tighten their criteria for credit cards. 7 per cent of adults in the UK have been denied a credit card in the last six months. Clearly, the UK’s appetite for credit is still there – it’s just that the supply is drying up.

Not only are rejections for new cards up (Barclaycard is being especially cautious, rejecting over 50% of new card applicants), but an estimated 1.8 million card users have had their credit limits reduced. Some card companies are even trying shed their existing customers; Egg froze the cards of over 160,000 problem customers earlier this year. Last year, everyone wanted to get in to the credit and insolvency industries – now they are falling over each other in their attempts to back out again.

This rejection effect can be cumulative – being rejected for a credit card is a black mark on your credit record, which makes it even harder to get any credit next time. There is a danger here that those with a borderline credit record who are seeking to refinance their way out of trouble may get caught in a downward spiral, as rejections pile up and damage their credit record still further.

Curbing the UK’s credit addiction is a necessary step, but some access to credit is needed to give people the flexibility to survive, particularly in troubled times like these. Plenty of people are borrowing just to ends meet, as they struggle to readjust to the rapidly rising cost of living and stinging mortgage increases. The gradual withdrawal of easy credit is a natural response to the credit crunch (and a healthy one), but the sudden disappearance of credit for everyone except those with pristine credit rating is likely to worst affect those who are at the ‘tipping point’ between serious debt and insolvency.

Rates and charges on credit cards have risen significantly in the past two years, new research shows, despite a cap restricting late payment charges imposed in 2006. The Office of Fair Trading imposed a £12 cap on late payment charges (some banks were charging over twice that), but since then average purchase rate APR on credit cards has increased from 14.9% to 16.4%. There have also been significant rises on a number of credit card services – the rate for taking out cash on credit cards has increased from 18.1% to 24.3%, while the cash advances are up from 2% to 3%. All in all, it is estimated that credit card borrowing is now 15% more expensive than it was before the cap on charges was put in place.

Previously, banks were unfairly penalising those who fell behind on their payments, but now every borrower is affected. The ‘back door’ nature of many of the charges has left many debtors unaware of the true cost of borrowing in many cases. Credit cards always one of the most tempting ways to borrow, simply because they are easy to acquire and fun to use. They are also amongst the most problematic forms of borrowing – few sources of credit have such a maze of variable rates, charges and deceptive offers seemingly designed to catch borrowers out. Earlier this week, this blog discovered the apparently deliberate trap on many 0% interest rate credit cards. There seems to be little to challenge the perception of credit cards as little more than convenient moneyspinners for creditors, dressed up as fashionable financial status symbols.

With the cost of living rising rapidly, and growing uncertainty over house prices, many people will be looking for a little extra money to help make ends meet. But anyone who borrows on a credit card needs to make sure that they know what they are getting into, and needs to make it their first priority to clear credit card debt before it grows out of control.

1 million Briton’s have “problem debts” that they are struggling to pay, and the number of people facing serious debt problems could double this year. The estimates come from a report by the TDX group, and paint a concerning picture of the current situation for debtors in the UK. The report, titled ‘UK Problem Debt – consumer crisis or efficient market?’, goes on to state there are approximately £25 million of problem debts, averaging out at £25,000 for each of the troubled debtors. About 60% of this problem debt, unsurprisingly, is on credit cards, with the remainer on loans.

The more worrying statistic is one from the previous year. An estimated 58% of problem debtors tackled their debts through some form of refinancing last year, such as balance transfer, consolidation loans and remortgaging. This isn’t concerning in itself – in fact it is a positive sign that people were intelligently finding ways to control their debt without having to resort to more serious debt solutions. What is worrying is that this option isn’t really available anymore. Stricter lending has made the more favourable low interest loans and 0% credit cards hard to come by, and the problems in the housing market mean that remortgaging and equity release aren’t as straightforward as they once were.

Refinancing is one of the early measures that can be taken to curb serious debt long before a Debt Management Plan, IVA or bankruptcy becomes necessary. If this option is taken away from debtors, through tighter lending conditions and the withdrawal of useful products, then we will see a sharp rise in the number of people entering into insolvency in the months to come.