Jill Kerby

UNSECURED CREDITORS MAY GET SOME RELIEF

The Code of Conduct for mortgage arrears means that mortgage holders who have been unable to pay their loans in full, or are in danger of falling into arrears, have a formal process by which their original contract can be adjusted or amended by their lender.  It also means that the lender cannot take legal action against them while the restructuring process is underway.

Do the holders of unsecured debt – like credit card, personal and hire purchase loans also need such formal intervention?

The Irish Brokers Association believe they do, if only based on their view that too many people have fallen into arrears on their home loans because they have bee bullied by the likes of credit card companies and the personal loan side of their banks to repay that unsecured debt first.  They describe it as a case of “who screams loudest gets paid first” but one that could put the debtor’s very home at risk.

With nearly 86,000 home owners in official arrears or already restructured, it isn’t too difficult to assume that a large proportion of these people are also having trouble paying some of their other debts.

The Regulator has already flagged some amendments to existing consumer credit terms covered by the Consumer Credit Directive that came into force last month in light of this growing unsecured debt problem, specifically that his office may impose the same sort of strict debt collection terms that apply to mortgage holders.  This is likely to include limiting the number of unsolicited letters to the debtor to no more than three a month and presumably other contacts.

Whether or the Regulator goes so far as to limit the legal procedures the unsecured lender can take if the borrower falls into arrears – as applies to mortgage borrowers – is less likely.  He is more likely to remind both parties that unsecured debts like credit card balances carry much higher interest rates for exactly that reason – they are not secured, as is a mortgage or a car, which can be repossessed.

Credit card debts appear to be the most problematic.  No surprise there:  there are 2,035,000 personal credit cards in Ireland, though 145,000 fewer than at the height of the boom in May 2007. 

Back then, we owed €2.544.6 billion in outstanding credit; today we owe €2.653 billion, €108 million MORE than we owed in 2007, despite our huge efforts in the past year to repay this debt and take on less.

The problem – as always with credit cards – is the huge interest rate charged and the exponentially negative compounding effect it has on the debt over time. (The reverse is true of course for your savings: time and a high interest rate will see an exponential growth of your money.)

There was a time when financial advisors recommended that you prioritise your debt payments, starting with the most expensive, because of this exponential effect of high interest on the capital. It’s still good advice IF your credit record is not impaired and you are managing to pay your mortgage, the light bill and can put food on the table.

These days, with so many people out of work and living on benefits and unable to do those last three things, if you are finding it hard to pay your credit bills.

First, do a proper financial statement that lays out all your income and outgoings. Cut out discretionary spending and try to secure better prices for food, utilities and insurance.  Take note of all these efforts in the budget statement.

Next, set up a meeting with your bank. If you are already being accommodated under by the Code of Conduct on mortgage arrears, tell them and ask for similar extended repayment terms for your credit card, overdraft or other unsecured personal loans.

If you don’t undertake this process, and continue to miss payments, you will come under pressure by the collection departments and perhaps even outside collection agencies. The bank may very well take you to Court. 

By being proactive you should be able to avoid this outcome, though you will still be left with an impaired credit record and you clearly, will not be able to use credit cards or get a personal loan until you repair your personal credit record. (You can request that record from the Irish Credit Bureau at www.icb.ie for €6.)

If your credit card debt is still under control – but only just – you should consider cutting up the card and paying it off in full, ideally with a local credit union loan which charge far less interest than the typical average 19.3% rate that now applies to the most high street bank-issued credit cards.

Another option to help you pay off your balance sooner – if you insist on keeping the card – is to switch to the three providers who give between six and 10 months zero interest: PTSB Ice card, MBNA platinum card and Tesco. Then stop making purchases.

And finally, if you want to keep using credit cards, and they are extremely useful, ALWAYS pay off the monthly balance by direct debit.  You’ll never pay another penny interest or pay a penalty for missing a repayment date.