Record numbers of people will become insolvent over the next two years accountancy firm KPMG announced this week.

They claim that at least 130,000 people will become bankrupt or take out an individual voluntary arrangement during 2008.

An IVA is a legally bound agreement that ensures creditors will not take insolvency action against whilst a debtor pays what he can afford for an interim period. Approximately two thirds of people who enter into an IVA are homeowners.

KPMG also predict that there will be a record-breaking 40,000 people going bankrupt or entering into an IVA in the first quarter of 2009 – 10,000 people more than in the same period last year.

KPMG state that rising mortgage costs and general day-to-day living will tip most people over the edge.

With the average mortgage standing at £158,000 and energy and food bills rising at an inflation busting pace, many families will need to pay out at least £2000 more per year to avoid going under financially.

Figures for insolvency in January to March this year shows that there was actually a small fall in insolvencies, this however seems to be only a temporary respite.

Economic growth fell to 0.4% in the first quarter of this year – in the same period last year it was 0.7%

This suggests that the Chancellor - Alistair Darling will not meet his forecast of 2% growth for 2008, outlined in April’s budget. Economists all seem to suggest that this is only the beginning of a deep and prolonged economic slowdown.

Almost five million people have been granted credit cards in the past year without having to prove their income, according to research published on Wednesday.

Some 84 percent of successful credit card applicants -- 4.8 million people -- were not asked to provide any proof of income, such as payslips, to support the figures stated in their applications in the past 12 months, according to a YouGov poll of 4,048 people.

The survey, commissioned by price comparison website uSwitch.com, also showed that 14 percent were not asked about their salary or outgoings during the application process -- yet they obtained average credit of 3,545 pounds, equal to a total of 2.9 billion pounds.

Just 8 percent of those surveyed were asked for proof of income or outgoings when taking out credit.

Some 5 percent of people confessed to lying about their salary when applying for a credit card, adding up to 70 percent onto their actual income and securing over 693 million pounds worth of credit as a result.

"We cannot ignore the fact that the credit crunch has forced lenders to tighten their belts and reject applications that may lead to further write-offs," said Simeon Linstead, head of personal finance at uSwitch.com.

"(But) the fact remains that just because a consumer appears to have a 'suitable' credit score, it doesn't mean they are always honest about their income and actually have the cash available each month to pay the bill.

"The credit squeeze will back some consumers into a corner and -- in sheer desperation -- people will resort to lying about their salaries as this is such an easy loophole to exploit."

He said it was too early to tell whether the latest version of the Banking Code, which came into effect in March 2008 and made credit reference checks mandatory, was having the desired effect.

The new code makes it necessary for companies to also take at least one of three other measures: obtain details of income and financial commitments; evidence of how finances have been handled in the past; use credit assessment techniques, such as credit scoring or internal credit scoring processes.

Independent research commissioned by credit reference agency Callcredit has revealed that 40% of the UK’s working population could not survive for more than a month on their savings alone. This figure peaks to a staggering 53% among the 25 – 34 year old age group.

The impact of the credit crunch means that one in ten people can no longer afford to save and have in fact started dipping into savings to meet their monthly outgoings, with the 18 – 24s most likely to have to resort to raiding their accounts to make ends meet (14pc).

The findings also reveal that one in twenty people are spending over 50% of their salary on unsecured debt repayments. While this remains a relatively low figure it has more than doubled compared to a previous survey conducted in September 2007.

Owen Roberts, head of Callcredit Check, commented, “These findings are a stark illustration of how the credit crunch is already affecting consumers; it’s clear that the rising cost of everyday living is having an immediate impact on our ability to save. Many UK workers are at what could be described as a financial tipping point where just one unexpected unfortunate incident could have dire financial consequences.”

The number of people facing bankruptcy has fallen, according to the Ministry of Justice.

According to its figures, 17,931 petitions for bankruptcy were issued from January to the end of March. This is 15% fewer than those from the same period of 2007.

The number of individuals choosing bankruptcy - called debtors' petitions - stood at 13,080 in the first quarter of 2008 - up from 11,674 in the previous three months, but still 13% down on the number of petitions in the same quarter of 2007.

Some 4,851 people were facing forced bankruptcy - creditors' petitions - in the first three months of 2008, up slightly on the 4,583 of the previous quarter but down 15% on the same time a year ago.

Credit data specialist Experian has revealed UK borrowing increased to over £1.1 trillion in the last year, despite showing signs of a slowdown.

In its annual UK debt report showed debt balances on outstanding mortgages, credit cards, loans and overdrafts rose by 9.24% to £1.1.59 trillion.

According to the report outstanding debt on mortgage balances showed the largest increase over the last 12 months.

Bruno Rost, spokesperson for Experian, said its results show lenders had been tightening lending criteria before August 2007.

He said: “It shows that growth in lending has slowed markedly across all key credit products and credit tightening on cards, loans and mortgages was already well established in advance of the so-called credit crunch”

Rost said the worst affected area was Northern Ireland which had shown a 23% increase in debt balances.

The data also revealed mortgage balances had risen 10.8% over the past 12 months compared to 16.4% in the previous 12 months.

It said the growth in outstanding mortgage balances had been in line with house price inflation around the country.

Rost said consumer loans had bucked the trend by showing a decrease iin debt balances.

He added: “The total balance on loans has actually decreased by 0.38 per cent, compared with an increase of 2.9 per cent in the previous 12 month period.”

The average stamp duty bill for first-time buyers has almost doubled over the last five years, says a report from mortgage lender Halifax.

The average bill in 2007 was £1,751 compared with £960 in 2002.

In the south-east, south-west and east of England almost all first-time buyers paid stamp duty, while in northern regions only 42% were liable, it said.

The Treasury pointed out that half of first-time buyers will pay no stamp duty this year.

The lowest, 1% tax band hits homes worth between £125,000 and £250,000.

'Raise thresholds'

Homes valued between £250,000 and £500,000 attract a 3% charge and properties worth more than that are taxed at 4%.

Although the government has raised the threshold at which buyers pay 1%, it has not kept pace with the surge in house prices.

"Stamp duty has again become an issue for first-time buyers because the stamp duty thresholds have not kept pace with house price inflation," said Martin Ellis, Halifax chief economist.

"We call on all political parties to raise the stamp duty thresholds to compensate for house price inflation over the past decade," he added.

But the government defended its record.

"Half of all first-time homebuyers and around two-fifths of all homebuyers will pay no Stamp Duty Land Tax this year," a Treasury spokesman said.

Meanwhile, the latest figures show that the UK housing market is slowing.

According to a monthly survey from the Halifax, prices across the UK fell by 0.3% in February, taking the annual rate of inflation down from 4.5% to 4.2%.

Banks have recently reported a sizeable increase in the amount of money that they have to write off because so many people have defaulted on their loans and credit cards.

Of course, people have to take responsibility if they've borrowed more than they can really afford but lenders must also take part of the blame for making credit too easily available.

Not surprisingly, lenders are being more careful when they select potential customers these days, but they still base their decision on three main factors.

1. Your application form
Lenders need basic information from you such as your name, age and address, how much you earn, how much you want to borrow and why.

There'll be certain questions that might seem irrelevant to you but the information you of you and give will be used to build up a ‘profile’ of you and your circumstances. This will enable them to 'score' you by allocating plus or minus points for information that they regard as good or bad.

2. Your credit files
Next they will carry out a search of your credit files. These play an important part in showing how well you manage your finances because they contain details of any County Court Judgements and bankruptcies. Alongside that will be information passed on to them from various banks and building societies about your payment history for cards, loans and mortgages that you already have, how much you've borrowed and how much credit you have available to you.

There are three main credit reference agencies holding this sort of information about you which lenders use, these are: -- Equifax, Experian and Call Credit -- and, as you have a right to see the information they hold on you, it's a good idea to send off for them occasionally to make sure the information they hold is correct and to ask for factual details to be rectified if a mistake has been made.

Every time a search is carried out it is logged on your files and that information is available to every other lender who needs to access it. In some cases, this can go against you -- for example, if you have approached several banks, it might appear that you are looking for lots of credit and could have been turned down even though you may have a perfectly good reason for not proceeding with each application.

If you go ahead with your application and you meet your monthly obligations on time, then your payment history for that particular borrowing will show up on your file as a series of zeros for each card or loan that you have. If you are late with your payments your track record is automatically altered even if you miss just one payment.

However, it's the Default notices and County Court Judgements which are of most concern to lenders and as these stay on your files for six years, even if you eventually manage to pay them off, it can still affect your chances of getting further credit. You'll either be turned down flat or you'll be charged a higher-than-usual interest rate.

If you have a bad record because of late payments, defaults or County Court Judgements, then there's not much you can do to improve matters except to make sure that your payments are on time in the future.

3. Your credit score
Finally, having checked your application form and your credit reference file, your prospective lender will then use that information to give you marks to determine whether you are a good or bad risk.

Each lender has different criteria when calculating your credit score. It depends on their target market and whether they want to lend money to people like you. It works on a points system: the more points you get, the more likely it is that you'll get credit.

Factors such as being married and being a homeowner will probably score highly because this implies stability. Your postcode may also be relevant because it indicates whether you live in an affluent area or not, but having lots of children could count against you because kids are expensive!

The most important thing is to make sure you are on the electoral roll. If you don't show up as being on the electoral roll, most lenders will automatically refuse you credit. So if you've recently moved, phone up your local council and ask to be registered as soon as possible.

Credit outstanding in December rose by £1,072 million, to stand at £65.0 billion, 2.1% below the level a year earlier.

The proportion of balances bearing interest rose from 72.9% to 73.1%.

There were 195.9 million transactions in the month (11.5% more than in November and 4.6% more than in the previous December), with a value of £13.3 billion (2.9% more than in November and 3.7% more than in the previous December).

The number of cards in issue at end-December was 65,368,000, relating to 55,113,000 accounts, 64.8% of which were active, ie had a balance outstanding.

These data cover the world-wide transactions of UK resident holders of cards issued in the UK by all financial institutions affiliated to either the Visa or Mastercard organisations.

Source: BBA

The number of IVAs transacted in the last quarter of 2007 plummeted by 27.3% on the same period the previous year as creditor approval criteria tightened.

There were 9,188 agreements placed in the fourth quarter of 2007, prompting many industry figures to warn again on the impact the stringent criteria from The Insolvency Exchange is having on the market.

Beverley Budsworth, managing director of The Debt Advisor, said it is not surprising to see the numbers of IVAs continuing to fall throughout 2007.

She explained: “The IVA industry has seen a turbulent year; The Insolvency Exchange (TIX) introduced IVA fee capping arrangements and some creditors (banks) introduced hurdle rates of 40% or simply rejected the IVA's put forward.

“These factors have made the management of many smaller IVAs economically less viable.

"In-turn, we have seen share prices of some larger AIM-listed IVA providers crash, forcing them to submit less IVA applications as they cut marketing spend, concentrating on more informal debt management plans.”

Total personal insolvencies for 2007 stood at 106,645 – with bankruptcies at 64,480, 2.4% higher than in 2006. There were 3,135 corporate liquidations in the fourth quarter of 2007.

However, chartered accountancy firm, Benedict Mackenzie, also warned that figures on corporate insolvencies do not tell the full story.

Rupert Mullins, partner at Benedict Mackenzie said: “The 32% drop in the number of company insolvencies flies in the face of recent reports of a downturn in the economy.

“It appears that many companies are weathering the storm for now, but if economic conditions do not improve over the next few months, we expect to see the number of insolvencies increase significantly by the time of next quarterly report.”

Source: Niche Personal Loans

The Government yesterday announced its plans for a new scheme that would allow struggling debtors to have a ‘payment holiday’ on their unsecured debts, in which a court order would freeze payments to creditors for a period of time. These Enforcement Restriction Orders, or EROs, would prevent penalty charges, charging orders, and ordinary repayment demands for up to one year.

There are a number of conditions. The debtor must have a clear reason for their inability to pay – loss of job, sudden illness and divorce being obvious examples. Simple mismangement of debt will not qualify a debtor for an ERO. Debtors will also have to prove that they will be able to afford the repayments at the end of the ERO. Certain debts, such as student loans and mortgage repayments, will be excluded, but there is no limit to the level of debt that can be included in the ERO. A side benefit of the proposal is that it is predicted to hit the Payment Protection Insurance industry hard. PPI has become notorious for being over-priced, mis-sold, and generally being an unnecessary insurance product.

The chief drawback is that interest on debts is not frozen. It is also not yet clear whether or not people will be restricted from taking more credit while under an ERO. People who unwisely enter into these Restriction Orders may suffer from the same fate as debtors who mismanage their consolidation loans, and just end up with more debt at the end of it.

Still, these proposals are to be welcomed. The sudden loss of income due to illness or loss of work is one of the classic ‘tipping points’ that pushes people into the debt spiral and towards insolvency. Rather than borrowing more to service their debts, debtors will have a chance to get their finances in order and address their debt problems sensibly. Debt Management Plans can provide a solution for moderate to low levels of debt, but they are informal and lack the legal protection offered by the EROs. Regulated and legally binding measures targeted at lower levels of debt could reduce the number of people forced into formal insolvency.

The bad news is that the EROs aren’t expected to come in until 2010 – too late for the thousands of debtors who will have slipped into insolvency by then. But it is a positive step that the government is prepared to provide legal protection for those who have fallen into debt through no fault of their own, and who just need a little time to make things right.

Source: iva.co.uk

A record number of people will be declared insolvent this year, as high levels of debt and the impact of the credit crunch take their toll on overstretched borrowers, it was predicted today.

Accountancy firm KPMG said it expected more than 130,000 people to be declared bankrupt or enter into an individual voluntary arrangement (IVA) with their creditors, up from 109,615 this year.

IVAs allow borrowers to restructure their debts so they can make affordable monthly payments for a fixed period of time and have their remaining debts written off at the end of that period.

This year, the average debtor entering an IVA owed £50,300, although more than 2,500 people are thought to have had debts exceeding £100,000.

The average proposed repayment was 38% of debts - £19,100 for the average debtor - KPMG said. As a result, £1.3bn was written off by creditors.

Mark Sands, director of personal insolvency at KPMG, said: "This high average level of debt clearly indicates that too many people have borrowings that they have no realistic hope of repaying.

"Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge."

Sands said the credit crunch would also have an impact, as lenders became more wary about who they accepted for credit cards and secured loans.

He warned: "Those in difficulty will find that their options are becoming limited – formal insolvency will for many be the only way out."

The number of personal insolvencies has more than doubled since 2004, when 46,650 people were declared bankrupt or entered an IVA.

The growth has been driven by a surge in the number of IVAs, following heavy marketing by debt management companies.

However, lenders have been cracking down on the plans, with some refusing to accept them and others raising the hurdle rate – the amount they are willing to accept as repayment – to 40p in the £1.

KPMG said its research showed 17% of people had had an application for an IVA turned down this year, compared with 15% in 2006.

A new code introduced in February will oblige a lender who rejects an IVA to give a specific reason for doing so.

Source Guardian unlimited

Britons’ lax monitoring of their money is putting £43.3 billion and wellbeing at risk

New research released today has revealed that only one in ten (14%) Britons polled in a new study would immediately notice if £1,000 went missing from their account.

When calculated at a national level, this figure amounts to an estimated £43.3 billion* in unwatched money, highlighting the careless way Britons currently monitor their finances.

Almost a quarter (21%) only check their bank balance once a month.
Almost one in five (16%) of Britons have “finance-phobia”, admitting that they are too afraid to check their balance
Over a quarter of Britons (28%) stated that they suffer sleepless nights over their finances

Britons’ money management found to be limited

A third (32%) of those polled stated that their knowledge of their bank balance was poor.
16% stated that they knew more about celebrity and sport trivia than their bank balance.
Around half (56%) of Britons check their bank balance once a week.
However, over one in four (28%) Britons believe that a better knowledge of household finances would help them wear the trousers in their relationship

The study, commissioned by mobile banking service Monilink, also demonstrates the impact of poor money management in the UK.

Alastair Lukies, chief executive of Monilink said “These findings suggest consumers need all the help they can get to keep tabs on their money. Poor money management and existence of ‘Finance-phobia’ in Britain is worrying considering the rising levels of debt problems Britons face”



Lack of money management contributing to the growth of British debt and overdrafts

Over a third (38%) of those polled admitted they had gone accidentally overdrawn due to a lack of knowledge about their bank balance. Women (41%) and those aged between 25 -34 (48%) were the worst offenders.
Almost one in five (18%) of people stated that each time they went overdrawn, this was by a sum of £300 or more.
Those who never checked their balance were almost twice as likely to go overdrawn by £300 or more than those who checked every week (16% compared to 30%).
Card and bank account fraud amounted to £423 million in 2007*, but only 13% of those polled currently worry about illegal withdrawals on their account.



Impact of the lack of financial control on Britons’ wellbeing

31% of women and 22% of men polled suffer sleepless nights over their finances.
The 25-34 age group emerged as the most stressed, with 35% losing sleep over their poor money management.
Almost half of Britons (41%) would like to feel more in control of their finances.
One in ten (8%) of those felt their finances are actively out of control. Women were most concerned about this, with (44%) wanting more control.
25–34 year olds again emerged as the leading problem group with 12% feeling their money management was out of control.



British ‘carefree’ attitude to going into debt revealed

One in ten (9%) of those polled would go overdrawn to buy something wanted but didn’t need, with 25 -34year olds being were most prone to this behaviour (15%).
When questioned about debt-threatening overspending, the most common unessential treats were food and drink (52%), 31% luxury goods purchases (cars, watches, etc) and clothes (19%).
When comparing genders, women’s favourite area of overspending was food and drink (55%). This was followed by luxury items e.g. jewellery (24%) and clothes (23%)
Men were most likely to overspend on luxury goods (46%), followed by food and drink (45%) and clothes (10%)



Launch of mobile banking offers busy Britons a money management lifeline

One in five (19%) of those prone to going overdrawn stated that easier access to their bank balance would help them stay in the black.
Of those who check their balance every day, 64% never go overdrawn.

Alastair Lukies said “As mobiles are also more widespread in the UK than PC’s, UK banks have woken up to the fact that mobile banking represents the future. Internet banking is OK if you are sat at a desk, but not so good when in the middle of a shop working out whether you can afford a purchase”

The number of orders for home repossessions has dropped despite the worries surrounding the extent of personal debt in the UK.

Figures from the Ministry of Justice show that the number of mortgage repossession orders during the third quarter dropped by one per cent year-on-year, falling to 23,086.

But the number of repossession claims by lenders increased by one per cent to 34,717 over the previous quarter.

An increase in the cost of borrowing and tighter lending conditions in the aftermath of the credit crisis led to economists expecting a rise in repossessions.

The Council of Mortgage Lenders (CML) predicted a 50 per cent jump in home repossessions for 2008.

Should the economy slow markedly over the coming months and unemployment start rising significantly, the number of home repossessions could surge.

Figures from the Insolvency service also showed a five per cent fall in the number of people declared insolvent in the last quarter due to lenders tightening up their criteria for products such as Individual Voluntary Arrangements or IVA’s.

Anyone falling outside defined "thresholds" could be at risk from the credit crisis.

Despite signs of gradual recovery in the mortgage markets, tighter credit conditions may re-emerge in the aftershock of the recent financial turmoil.

But people with debt repayments of more than 55 per cent of their household income or net worth less than 33 per cent of their income could be in jeopardy.

The two thresholds provide a handy guide for consumers to see if they are potentially sitting ducks. By ensuring that people stay comfortably within them they should be better placed to face any unexpected shocks in the future.

Consumers should draw up a statement of affairs or an income and expenditure to get an accurate view of their financial situation and to see if they are at risk.

The Debt Advice Bureau has responded to the news that over one million homeowners pay their mortgages on credit.

Stephen Rose, director of Debt Advice Bureau, believes that people using credit cards to meet mortgage payments may not be treading on a dangerous path after a poll from YouGov found six per cent needed a credit card to meet payments.

"If people are using credit cards it may mean that there are cash flow problems anyway, it really depends what they're paying on the credit card versus what they are paying on the mortgage," he said.

"There are people out there who have technically bought a house on a credit card and they've done very well. I bought my first property off the back of credit cards and the credit cards were a hell of a lot less than a mortgage," he added.

New research has found that more than 738,000 applicants have been turned down by mortgage firms in the last six months.

In the six months from March the figures have shown that 738,000 mortgages were rejected, compared to 463,000 in the previous six months.

The research also states that those aged 25 to 34 were worst affected, about 382,000 had an application rejected.

The financial environment is far more rigorous compared to this time last year and people need to be prepared for possible rejection.

The problem is not only connected with first time buyers, more people who are looking to remortgage are also finding that they are also being refused. In recent months this has been as a result of the bad debt crisis that has affected sub-prime mortgage markets in the USA.

Put quite simply lenders do not want to take risks when there are pressures on how much people can afford, so it's up to the applicant to convince the potential lender that they can afford the ongoing repayments on their mortgage.

Chancellor Alistair Darling has urged Britain's banks to take a more cautious approach to lending.

In an interview with the Daily Telegraph, Mr Darling said both lenders and borrowers needed to "think long and hard" about the risks involved.

He also suggested a return to "good, old-fashioned banking" and voiced concern over loan consolidation TV ads.

His comments come amid volatile markets and concerns about the scale of debt taken on by British consumers.

The chancellor told the Telegraph primary responsibility had to rest with individuals.

Elementary banking

He said: "In crude terms [lenders] need to know who they're lending to, how much they're lending and what the risk is.

"Now, that's elementary banking, one might think, but there are times when going back to good old-fashioned banking may not be a bad idea."

But Mr Darling made no suggestion government would intervene with tighter regulation of lending.

"My starting point is that government can't stand on the shoes of borrowers or lenders," he said.

"[Borrowers] need to ask themselves, 'Can I repay this?' and lenders need to ask themselves, 'If it goes wrong, can I get it back?'. People do need to think long and hard about this," he warned.

But he did say the Treasury was looking into commercials - "the sort you see on daytime TV" - which encourage consumers in debt to consolidate their loans.

Experts have warned such schemes can actually push households further into debt.

'More honesty'

He added that banks themselves may bear some of the responsibility for people getting into problems with debt they cannot handle.

"Institutions have in some cases been prepared to lend to people without actually checking if they were ever going to repay it," he said.

He also suggested the City and financial institutions should take a more sceptical approach to new and complex financial instruments which appear to offer spectacular rates of return.

Recent cases have shown such instruments have turned out to be backed by risky loans to sub-prime home-buyers in the US.

"Banks try to only lend responsibly but often they have been dazzled by the technology and forgotten to eyeball the customer" Malcolm Hurlston, Consumer Credit Counselling Service

He told the newspaper: "Institutions themselves need to open their own eyes and be more honest.

"When someone comes up with a fantastic way of making money they need to ask, how is this money being made and what are the risks?"

'Stigma'

Mr Darling's comments were welcomed by the Consumer Credit Counselling Service, which advises those in financial difficulties.

"Banks try to only lend responsibly but often they have been dazzled by the technology and forgotten to eyeball the customer," said chairman Malcolm Hurlston.

"There should also be responsible borrowing but consumers can be led astray by emotions - not helped by cynical advertising on daytime television, as highlighted by the Chancellor, with for-profit providers offering minority solutions to mass problems."

The director of public policy for Citizens Advice, Teresa Perchard, said that a campaign to inform people about better lending and borrowing habits was needed if behaviour was going to change.

"The Chancellor is right to highlight the need for more responsible lending by banks and credit providers," she said.

"Borrowers and lenders need to go into lending with their eyes open. The impact of unmanageable debt on individuals is severe and long-lasting. For some it means bankruptcy and years of stigma."

The number of people seeking advice on how to meet their debts has hit record levels, the Citizens Advice Bureau (CAB) has warned.

The CAB said 1.7 million people sought debt counselling last year, up 20%. CAB is handling 6,600 debt enquiries a day.

Those with problems paying credit card bills and other unsecured loans accounted for 40% of all enquiries.

But CAB reported a "worrying" rise in the number of people struggling to meet day-to-day outgoings like phone bills.

'Paying the price'

The past two years have seen the number of people seeking debt advice spiral, as a sharp rise in the cost of borrowing has made life far more difficult for many households.

CAB said the figures illustrated how the consumer credit boom of the past decade - characterised by an easy availability of cheap credit and by people taking on more and more debt - had turned sour for many.

"These figures are worrying evidence that while many have enjoyed the benefits of the credit boom, a large and growing number of people continue to pay the price," said David Harker, CAB's chief executive.

"Lenders need to do much more to check that borrowers are really in a position to keep up repayments"
David Harker, Citizens Advice Bureau

Bankruptcy-related enquiries rose 50% last year, while the number of people requiring help with their overdrafts rose 14%. Mortgage-related enquiries rose by 11%.

Most disturbing of all, the CAB argued, was a 33% rise in the number of people struggling to pay their energy bills and a 25% rise in enquiries about council tax payments.

Banks and other financial providers needed to act more responsibly, Mr Harker stressed, by not offering new sources of finance to people who were already struggling.

"Lenders need to do much more to check that borrowers are really in a position to keep up repayments when they take out credit," he said.

"We also want to see creditors being more willing to negotiate with people in debt."

The CAB added that it needed 5,000 new volunteers to deal with the surge in enquiries.

A number of UK lenders, including HSBC, Lloyds TSB, Royal Bank of Scotland and Nationwide, have agreed to go to court in a test case about overdraft charges.

On Friday, and with the banks' backing, the Office of Fair Trading will file an action arguing that charges are unfair.

Banks have had a long-running battle with consumers over whether fees levied for unauthorised borrowing are legal.

Tens of thousands of cases have already been settled out of court, costing the banks millions of pounds.

Market watchdog the Financial Services Authority (FSA) will allow banks to suspend dealing with any claims for repayment of overdraft charges filed against them until the test case has been decided.

However, the banks will still need to make a note of any claims lodged, and will have to honour offers to settle that were made before the test case and FSA waiver were announced.

Unfairness rules

Angela Knight, chief executive of the British Bankers' Association (BBA) said that legal clarity was needed to end uncertainty for banks and consumers alike.

She added that the banks had not softened their view that the charges were legal and fair, and said that the lenders could only "start looking at the issues underneath" once they had a ruling.

The Office for Fair Trading (OFT) said that the lenders had approached the UK's financial watchdogs in order to sort out the problem and agreed to the test cases in England and Wales, Scotland and Northern Ireland.


LENDERS IN TEST CASE
Barclays
HSBC
Royal Bank of Scotland
Clydesdale Bank
HBOS
Abbey National
Lloyds TSB
Nationwide

The OFT said that on Friday it would commence proceedings in England's High Court for "a declaration on the application of the law in respect of unauthorised overdraft charges".

At the heart of the court case will be whether or not the overdraft charges are a fair reflection of the costs incurred by banks.

Under current rules, the banks cannot make punitive charges when customers exceed their overdraft limit without prior permission or write cheques when they have insufficient funds in their accounts.

Customers have been arguing that the fees levied far exceed the costs incurred by the banks.

"The OFT considers that a quick determination of this point of principle will assist in securing a clear and orderly resolution of the fairness of these charges," it said.

Out of court?

To date, the banks have been reluctant to contest such cases, usually settling out-of-court.

If a bank were to do so and lose its argument that the charges were fair, it could lead to many more bank customers getting refunds, analysts said.

The BBA's Ms Knight said that the banks had been unwilling to take an individual to court as the case would be different from person to person and would not offer a definitive answer on the legal issues being questioned.

She declined to say how much the banks stood to lose should the test case go against them, but said that it could affect the way they do business in the UK.

There has been speculation that lenders could end their free consumer bank accounts should the ruling go against them.

"We are defenders of free banking," Ms Knight said, adding that while it was too early to say what the outcome of the court case would be "we cannot say it will have no impact".

Has an annual fee suddenly appeared on your credit card? If not then it may do soon.

In May last year, credit card companies had a spanking from the Office of Fair Trading. Their lucrative penalty fees were capped after the OFT ruled that any late payment or unauthorised borrowing charge levied by a credit card provider was likely to be illegal if it totalled more than £12. Most lenders had routinely charged between £30 and £40.

Now it is revealed that profits made by Britain's credit card providers almost halved last year as bad debts increased and the effects of the OFT's ruling kicked in. Banking analysts Lafferty said UK credit card providers made total profits of £1.16bn in 2006, 43% less than in 2005. Boo hoo. Except now card issuers are increasingly changing the terms and conditions of cards to recoup the lost revenue. The latest method is to bring in an annual fee.

"Most annual fees recently introduced have the common condition to charge only when the card has low usage, either in terms of the frequency of transactions or their value," says Michelle Slade of Moneyfacts.co.uk. "But we must remember there are several cards available which charge either a monthly or annual fee regardless of how many times you use your card. Generally you will be paying for the additional benefits and incentives. But the fees on credit cards need to come with a similar warning to those on packaged current accounts."

Are you really getting what you pay for?

The most common benefit is annual travel insurance, while others include purchase protection or discounted offers. But as with any benefit it's worth checking that it is something that you will actually use and gain some benefit from. Take the travel insurance offered on these cards for example; many will require you to pay for your holiday with your card, which in many instances will incur a transaction cost, ultimately meaning that it could have been cheaper to buy your insurance independently. And before you travel, check the policy covers all you need. Is it worldwide or just for Europe? Does it cover an individual or your family? Does it cover winter sports? Are existing medical conditions covered? What are the maximum payouts?

"Don't think incentives are only available on annual / monthly fee cards, as many other cards offer incentives, including a handful which include worldwide travel insurance," advises Slade. "Fees can range from £2 pm (£24 pa) to £275 pa, but alarmingly there seems to be little difference in the benefits offered. This is highlighted with the two Co-op cards listed in the table below. These cards offer the same benefits, but one charges £2 per month and the other £120 per year. The difference between these cards is the balance transfer deal available, the interest rates and the guarantee to match an existing credit limit. As neither of these cards offer the most competitive deal in the market, it would be worthwhile shopping around for the best deal and use the money saved to buy any benefits independently."

Britain's biggest card firm, Barclaycard, is the latest to threaten annual fees, starting with around 1million 'inactive' cardholders who could be told to use their card regularly if they want to avoid a fee. "We are considering a fee for a minority of customers who simply do not use their card. Details aren't yet final but we expect the amount to be between £10 and £20 - less than £2 per month," said the company. It declined to say what will constitute an 'inactive' cardholder and argues that the cost of maintaining unused accounts is borne by regular borrowers, but analysts said the fees could raise up to £20m a year for the company.

Growing trend

Barclaycard will be follow a developing trend if it decides to introduce the fee. Lloyds TSB has hit 'inactive' borrowers with a £35 fee on 50,000 accounts which provided them with £1.79million in just one month. From the beginning of this month, Morgan Stanley introduced a £20 fee for some of its Black card customers who do not use their card regularly enough. MBNA has warned those who have overpaid a bill, leaving a credit balance on their account for 12 months or more, that they must pay the £10 penalty unless they transfer the cash, spend it or donate it to MBNA's favoured charity (insert obvious joke here) by the end of March.

Fees of £24 have also been levied on Cooperative Bank's Platinum and Northern Rock's Base Rate Visa cards. The Royal Bank of Scotland/NatWest group even fines card customers £12 for failing to alert it to a change of address. It has also introduced higher interest rates on cash withdrawals. Nick White, director of financial services at uSwitch.com, warns that other card providers are likely to follow the company's lead. "Barclaycard is by the far the UK's largest card provider. It has a 15% share of the market, and if it were able to get its customers to pay an annual fee, it is likely that the trend would spread across the entire industry before too long."

Financial-research firm Defaqto believes annual fees on credit cards will become the norm by the end of this decade. Already one in eight credit card companies have at least one credit card with an annual fee, according to new analysis by MoneyExpert.com. Its figures show that the highest fee is £275 a year and the lowest £24. However despite paying for the privilege of using a credit card, customers of fee-paying cards aren't getting deals to match. Only two cards offer any kind of introductory offer on balance transfers or purchases, at a rate of around 5.5% for six months. The average standard APR on balance transfers is 16.78% and on purchases is a staggering 27.1%.

"We thought we'd seen the end of annual fees on credit cards, but we think there could be a return sooner rather than later," says Sean Gardner, Chief Executive of MoneyExpert.com. Credit card companies will be under pressure to improve profits and reduce bad debts, and that could mean finding customers who are prepared to pay for credit. MoneyExpert.com's research shows the average standard APR on balance transfers across all credit cards is 16.16 per cent, and 16.74 per cent on purchases. There are now 156 cards on the market with 0% balance transfer deals with the best offers lasting 12 or 13 months.

What do you get for your money?

Card	Minimum Income	Fee	Benefits
Citi AAdvantage Gold Visa	£20,000 pa	£25 pa *	Worldwide Travel Insurance, Baggage loss (up to £500), Flight delay (up to £500), 1 year extended appliance warranty, medical insurance and free purchase protection.
Co-operative Bank Gold Base Rate Visa	£15,000 pa	£120 pa	Free independent financial advice, discounts on holidays booked via the Co-operative Visa Travel Club and £100K of travel accident insurance.
Co-operative Bank Platinum Tracker Visa	£25,000 pa	£2 pm	Free independent financial advice, discounts on holidays booked via the Co-operative Visa Travel Club and £100K of travel accident insurance.
MBNA Travel Amex	Nil	£95 pa	Travel service, worldwide travel insurance, lost/delayed luggage (up to £1.5K), Travel inconvenience insurance (up to £750), £100K of Travel Accident Insurance and Free purchase protection, Travel and hotel savings plus concierge and priority pass service.
i24 MasterCard (Funded by Goldfish)	£50,000 pa	£275 pa	24hr travel assistance, worldwide travel insurance, lost/delayed luggage insurance, flight delay/cancellation insurance, concierge service, priority pass to airport lounges, £350K of Travel Accident Insurance and free purchase protection.
Northern Rock Base Rate Visa	£10,000 pa	£2 pm	£25K Travel Accident Insurance.

Source: Moneyfacts.co.uk

Borrowing is so much a part of 21st century life that being declined for a loan, credit card or mortgage can come as a shock, especially if your finances are well under control. Here, we explain what could be counting against you – and what you can do about it. There’s a score that can affect your life just as much as your bank balance or your tax code. It’s the credit score that lenders calculate when you apply for a loan, mortgage or credit card and it represents the risk they take in lending to you – because there’s always a risk that a customer might not repay what they borrow.

Lenders use the information you give them on your application form plus details on your credit report – the personal financial record that shows what credit you have taken out in the recent past, your repayment history, whether you have any court judgments or have been bankrupt and whether you are registered to vote.

Each item of information is allocated a value. Generally, the higher your score, the easier you will find it to borrow. So if you’re comfortably off and managing well, why would a lender turn you down?

You haven’t borrowed enough in the past

You’d think lenders would love a customer with no debts – but it isn't as simple as that. They rely on the details in your credit report to show them that you make repayments on time and are a reliable person. If you have no track record, they cannot tell how you might behave in future and could mark you down because they have no evidence of you being someone who manages credit well. If you fear this could happen to you, ensure your lender has full information about your situation – for example, that you own your home and have paid off your mortgage, or that you use a debit card because you live within your means. They can then make checks and come to a rational decision.

You don’t fit the profile for the particular lender or the type of credit you asked for

Confusingly, you don't have a single credit score. Different lenders use different ways to work out their scores and sometimes one lender will even use different calculations for different products. They target specific groups of people and you may not fit their template. Ideally, you should do your research before you apply and identify lenders who want to deal with people like you and what product they have for you – for example, for home owners, students, older people and so on. The personal finance pages in newspapers, specialist magazines and websites will help.

There are too many recent searches on your credit report

Each time you apply for credit, you will give permission for the lender to search – look at the information on – your credit report. This search leaves a record of the check that you and other lenders can see. If you apply to multiple lenders in a short space of time, your credit report may give the impression that you are taking on more credit than you can afford. Future lenders can interpret this as meaning that you are desperate for money, overextended or even that a fraudster is using your identity to get lots of credit, fast. Make sure that when you approach lenders for information about their products, they don't think you are making an application. Always explain that you want details, or a quote, but that you haven’t yet decided to apply. If you think there are searches on your credit report that shouldn’t be there, contact the lenders involved, explain that you were only looking for information and ask them to amend your credit report.

You had problems years ago

Today, you’re financially fit – but perhaps things haven’t always been so good. If you have missed credit repayments in the past, a record of these arrears can stay on your credit report for up to 36 months. With a court judgment, the evidence is there for six years. Information about a bankruptcy also stays on record for at least six years and a bankruptcy restrictions order can remain there for as long as 15 years. Lenders see these and mark you down when scoring your credit application, because they fear you may not honour your obligations to them if you have failed with others in the past. Don't panic – you may be able to take remedial action. You can ask to add an explanation of the circumstances surrounding any problems that caused adverse information to be added to your credit report. For example, you might have missed a few repayments because of illness or an accident. The credit reference agency will help you add a note explaining what happened and why things are different now.

You aren’t registered to vote

Lenders use local electoral registers to check that you are who you say you are and live where you say you live. If they don't find your name at your address, they may need to make further checks or can even turn you down. The solution is simple: register at once and ensure that you have been taken off the electoral roll at any previous addresses.

Despite the major issues that are dominating the news agenda, such as the environment, crime and terrorism, new research from Abbey reveals that finances are perceived as the biggest threat to quality of life. The Abbey Lifestyle Report, which looks at working trends and concerns across the UK, shows that almost one in four people (24%) identify money worries as the biggest threat to their quality of life. By contrast, environmental concerns barely registered, with only four% highlighting the environment as a major worry.

Retired people are among the least concerned with the environment (three%), with the research indicating that pensioners may be some of the biggest carbon culprits, spending almost a quarter of their leisure income on travel. For this group their personal health is the biggest concern and they are the section of society with the biggest fear of being victims of crime. Parents are the most concerned about the environment although only one-in-20 see it as the biggest threat to their quality of life.

Other issues high on the news agenda but low on the public’s list of worries include crime (11%) and terrorism (nine%). Fears vary greatly by region though, and while only six% of Scots see terrorism as the biggest threat this rises to 11% in the Midlands, the location of a number of recent police operations linked to the prevention of terrorism.

In spite of these concerns, the nation is optimistic about 2007 with 32% of UK adults believing that they will have a better quality of life next year compared with only 15% who think their quality of life will deteriorate.

Students are the most optimistic, with almost half (49%) believing that they will have a better quality of life in 2007. Retired people are the most pessimistic, with just 21% believing that they will have a better quality of life.

Sue Hayes of Abbey commented: “People are generally positive about their quality of life in 2007 and the much-publicised issues around crime and the environment don’t seem to be denting this optimism. The real concern for people is money and we are hoping that this is a signal that people are planning to get more engaged with their finances in 2007.”

A quarter of credit card holders have transferred their balance onto another card in the last year, research from Moneyexpert.com shows.

Around eight million people have transferred a huge £6.5 billion between cards - around £760 each - despite credit card balance transfer fees averaging 2.1 per cent.

This means Brits looking for a cheap credit card could pay £105 on a balance of £5,000, though long-term savings could be much greater.

People aged 30 to 50-years-old were the most likely to be transferring large balances, seven per cent moving a balance of more than £5,000, compared to two per cent of over-50s and 18 to 29-year-olds.

And Scots lead the country when it comes to transferring the largest balances, moving £1,110.39 each on average, with around eight per cent transferring over £5,000 onto a cheaper credit card, well ahead of the national average of four per cent.

"It is yet more evidence of the UK’s debt culture that so many people have balances of more than £5,000 on their credit cards," said Sean Gardner, chief executive of Moneyexpert.

"While it is heartening that people are getting the message and taking advantage of balance transfer offers from other providers, customers need to remember that switching balances should also mean cutting debts. Changing to another card shouldn’t be seen as a licence to carry on spending."

Mr Gardner advised credit card holders to look carefully at balance transfer fees when making the decision to move debts onto a cheap credit card.

"And remember switching cards should be the first step to getting your debts under control. You need to commit to a plan to paying off your cards if at all possible."

Hugely expensive credit deals are being pushed by companies capitalising on the need of cash-strapped households to find money quickly in the run-up to Christmas.

Provident Financial, the credit-pusher giant that specialises in lending to those on low incomes and those without bank accounts, has blitzed tens of thousands of homes with junk mail loan offers.

The typical rate of interest charged is 177%, though for some borrowers it could be more than 300%.

'If you've realised you need extra cash for Christmas, don't worry,' gushes Provident's offer. 'Don't miss out on the Christmas you want!' The mailings contain its much-loved gimmick of a fake cheque made out to the addressee, with the words: 'Turn this into CASH - NOW!'

Other firms are offering even dearer credit, with the APR running into thousands or, unbelievably, tens of thousands.

Paydayuk.co.uk, for instance, charges borrowers £50 for a loan of £200, which for short-term borrowing is an APR of more than 22,600%.

Another deal is from uncle-buck.co.uk, which charges borrowers £75 for a one month loan of £250 - making a total repayable of £325. This works out at an APR of 2,339.3%.

Rival lender 4cashnow.co.uk offers similar deals. Here, borrowers write cheques to 4cashnow.co.uk, which advances the money immediately, but only banks the cheques on the borrowers' next payday. This can be expensive. Borrowing £170 for one month, for instance, costs £30, which gives an APR of 578%.

Several other online companies, such as yesloansuk.com and payday-express.co.uk, offer similar deals. They target those who cannot borrow elsewhere.

Mainstream credit-pushers, including Tesco, are also greedily vying for seasonal business. Many have cynically bought advertising rights to words such as 'Christmas' to ensure that when borrowers-search the web for loans, their deals come up first.

Typing the words 'Christmas credit' into Google, for instance, brings Tesco's Christmas loan offer to the top of the list. Tesco promises: 'Pay nothing for two months and enjoy the Christmas you've dreamed of!' But borrowers do have alternatives to companies such as Tesco that push credit for profit.

Credit unions, which are run on behalf of their members, offer loans at a rate that by law cannot exceed 2% a month of the outstanding balance, but many are far cheaper than that.

Though unions traditionally required members to save with them first before they could borrow, more than 100 offer instant credit to new members.

'They particularly suit borrowers needing smaller sums over shorter terms', says Mark Lyonette, chief executive of the Association of British Credit Unions.

Borrowers must qualify for credit union membership, which is usually based on a member's occupation or where they live.

Most people are eligible to join a union, Lyonette claims. Provident Financial spokesman David Stevenson says: 'We are not lending to the poorest of the poor. Our agents are paid on what they collect, not what they lend, so they are not incentivised like some other lenders.'

Tesco insists it has not paid for the search word 'Christmas' to flag up its deals, but says: 'We use easily recognisable terms such as cash and credit to speed up searches.'

Cash-strapped Farepak victims are being targeted by unscrupulous loan firms cashing in on heartache, an MP warned today.

Hard-up families facing a bleak Christmas could be fleeced of their remaining cash by signing up for loans at exorbitant rates of interest.

Caerphilly MP Wayne David is urging anyone looking to take out a loan to use local Credit Unions which offer ultra low interest rates.

He fears vulnerable people who lost out when the Farepak savings scheme collapsed could otherwise be plunged into a cycle of debt misery.

"It is a very real concern and people are certainly being approached in Wales," the Labour MP warned today.

"Loan companies are certainly targeting people that they believe have had dealings with Farepak.

"They are not advertising as such, it is being done by word of mouth, but the sales people tend to work door-to-door anyway."

He added: "I am careful to say that what these companies are doing is not illegal – but it is certainly immoral.

"If they genuinely wanted to help these people they would direct them to the nearest Credit Union."

He said he had been approached by a concerned local branch of the Citizen’s Advice Bureau operating in Bargoed, in south Wales.

It is already a community which has problems with loan shark companies preying on the poorest families, he said.

He added that former Farepak customers living in the town are now being sought out as ideal candidates for high interest loans.

He warned that some rates of interest are as high as 100%.

"People would have to pay back a heck of a lot of money over the coming weeks and months," Mr David said.

He said that as far as Wales was concerned the Welsh Assembly Government had offered to underwrite loans to former Farepak customers.

He said for such families joining a Credit Union the stipulation that they must be a member for some time before being eligible for a loan had been waived.