Negotiate the money minefield

Posted on: 12 June 2009 by Gareth Hargreaves

Type debt or credit into an internet search engine and you will see hundreds of ads offering you a way out of your money troubles or a quick fix to repair your credit history.

Some are genuine deals, while others could make matters worse. This guide looks at the truth behind some common claims to help you navigate the money minefield.

The Promise: Consolidate your debts into one personal loan with lower monthly repayments.

The Reality: This can be a good way to simplify your finances and bring your budget under control, especially if you use the loan to pay off borrowings that are charging higher rates of interest. Just remember that lower repayments can mean the loan will have longer to run, so you could be paying it off for many years. You could also face set-up fees at the start and redemption penalties if you repay it early.

What To Do: Read the small print and understand exactly how much you will pay in total and the penalties or fees you could face. Because the interest you pay will depend on your credit history, it's also worth checking your credit report before you apply. This is the personal history of your credit accounts, such as loans, mortgages and credit cards, plus your repayment record and other data that lenders use when they decide whether to make you an offer and what interest rate to charge.

The Promise: An Individual Voluntary Arrangement (IVA) is the easy way out of debt.

The Reality: An IVA allows you to avoid bankruptcy by coming to an agreement with your creditors but you won't be able to walk away from your debts. Generally, you make a series of monthly payments and the IVA will usually run for five years. Your wages will be monitored during this time and if you earn more, you will have to pay more.

You may also be forced to remortgage your home to release equity as a way of paying off the debt. IVAs are legally binding agreements, so it's a criminal offence to you lie or try to avoid paying off any of your creditors. An IVA will still stay on your credit report for six years, which could affect your ability to get credit for this period.

What To Do: You may be able to come to an agreement with your creditors without the need for an IVA. If you are having trouble repaying mortgage, loan or credit card debt, talk to your lenders, who may agree a new schedule of payments or negotiate an interest freeze.

You can also get free advice and help dealing with your creditors from Citizens Advice at www.adviceguide.org.uk, National Debtline at www.nationaldebtline.co.uk or the Consumer Credit Counselling Service at www.cccs.co.uk. Your local council may also run debt counselling services.

The Promise: A debt management company will help you to clear your debts quickly, usually within five years.

The Reality: Many of these companies will focus on persuading you to take out an IVA. They usually get paid commission for doing this and you will also have to pay them a fee.

What To Do: Many of these companies play on your natural fear of negotiating directly with your creditors and offer to take the job off your hands. But charitable and government-funded organisations such as Citizens Advice, National Debtline and the Consumer Credit Counselling Service will do the same thing for free and help you to explore other routes as well.  You should never have to pay for debt counselling.

The Promise: A credit-builder card will boost your credit rating.

The Reality: This could be true if you've never had a credit account or have paid off and closed down all of your accounts. Before they decide whether you're credit-worthy, lenders look at your credit report to see if you have previously been a responsible and reliable borrower who makes repayments on time and in full. If you have no credit history, they can't guess how you might behave in future and could even turn you down.

If, however, you have a record of unpaid debts and money problems, no card in the world can improve your credit status. You can only improve it by better financial behaviour and ensuring it is accurate and up to date.

What To Do: Research what's on offer to find the deal that suits you best. Watch out for application, set-up or annual fees or penalties and choose a card designed for people like you, so you're likely to be accepted. Then use the card to buy everyday items you'd need in any case and pay off your bill in full each month. That way, you'll avoid interest charges while you build up a track record that could allow you to borrow more easily and on more favourable terms in the future.

The Promise: A credit repair agency will improve your credit status.

The Reality: Some of these organisations will try to sell you a loan. Others charge for services such as removing records of court judgments for non-payment of debts from your credit report. They may assure you that claiming a court summons was not received or that correct procedure was not followed will persuade a court to remove a judgment from its records, but it won't.

A CCJ can only be marked as Satisfied if you have paid off the debt. Even then, it will remain on your credit report for six years.

What To Do: You are the only person who can improve your credit history and credit rating. Start by checking your credit report. Look out for clerical errors, accounts marked as open that you know you've closed and any suspicious or unfamiliar transactions. If you find anything you disagree with, contact the credit bureaux. Then focus on other improvements. For example, close unused accounts and register to vote at your current address.

You can also ask to add a note of explanation if special circumstances, such as a major illness, explain past problems.

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