Taking the CreditConsumer Credit and Debt in Northern Ireland

Elizabeth House116 Holywood Road

Belfast BT4 1NY

Telephone/Textphone:028 9067 2488

Fax:028 9065 7701

Email:info@gccni.org.uk

Websiteswww.gccni.org.uk

www.consumerline.org

ISBN: 1 871095 45 X

Contents

Consumer Tips 2

Key Definitions and Methodology 4

Executive Summary: Conclusions and Recommendations 7

1. Introduction 15

2. Consumer Attitudes to Credit 17

3. Type of Credit Held by Consumers 23

4. Knowledge of Annual Percentage Rates 34

5. Credit Cards: In Depth 36

6. What Credit is Used For 40

7. Amount of Consumer Debt in Northern Ireland 43

8. Consumer Financial Advice 47

Appendix A: Summary of the General Consumer Council’s Store Card Poll

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Managing your Credit

£ Plan your repayments – know exactly what interest you are being charged and whether your payments are actually reducing the amount owed.

£ Make sure you understand the consequences of not making the minimum payment or your payment arriving late such as extra charges or your card being stopped. It may also affect your credit rating.

£ Withdrawing cash on your credit card can be expensive. The interest rate tends to be higher for withdrawing cash than for making purchasesusing your card. Make sure you understand the interest and charges levied for the different types of transactions.

Finding it Difficult to Keep up?

£ If you think you will have trouble managing your payments, seek adviceand support as soon as possible. Your local Citizens Advice, independent advice centre and the Consumer Credit Counselling Service all offer free and confidential advice.

£ Put your debts in order. Prioritise which debts you need to pay first and rank them in order of necessity.

£ Don't borrow any more money or take on any more debts until you have repaid what you already owe.

£ Do not ignore the problem. Your debt will not disappear by itself.

£ Talk to your lenders and try to come to an agreement.

£ Remember all credit has to be repaid.

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Consumer Tips

Budgeting and Managing your Finances

£ Monitor and control your daily spend. Don't buy on impulse - make a list of what you need and before you make your purchase ask yourself, can you afford it?

£ Review your finances on a regular basis.

£ Assess your situation when considering taking new credit to see if, firstly you need the credit and secondly, if you can afford to make the repayments.

Choosing Credit Options

£ Before signing a credit agreement make sure you understand all the terms, conditions and charges. If there is something that you are unsure about, ask the lender and write down the answer for future reference.

£ Shop around and review your bank account, credit card and mortgageto see if you are getting the best deal. Also, calculate the total amount you will have to pay out over the length of the loan.

£ Think twice before getting a store card as the interest is often much higher than normal credit cards.

£ Try not to overdraw from your bank account if an overdraft has not been arranged, as your bank will charge you. Some banks offer a short-term overdraft or “buffer zone” at a free or discounted interest rate.

£ Avoid using illegal money lenders.

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MortgageA loan to buy a property and can be for varying lengths of time.

OverdraftMoney you owe to your bank through your current account.

Personal loanA loan, which you take out as an individual, with a fixed interest rate anda fixed number of repayments.

Secured loanA loan for which you put up an asset, such as your home, as security; ifyou do not keep up your repayments, the lender can sell your home to gettheir money back.

Store cardA card that enables you to buy goods on credit at a particular shop orchain of shops.

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Key Definitions and Methodology

Annual Percentage Rate (APR)The yearly cost of a credit agreement, including interest and charges,expressed as a percentage of the amount advanced.

Consolidated loanA loan taken out to pay off all or some of existing debts or credit agreements.

Credit cardAny card that may be used repeatedly to borrow money or buy productsand services on credit.

CreditA contractual agreement in which a borrower receives something of valuenow and agrees to repay the individual or company back at some laterdate, usually with added interest.

Disposable incomeThe income after taxes, National Insurance, superannuation and otherdeductions have been subtracted. It is the money that is available to anindividual for saving or spending.

Gross monthly incomeA person's gross income is the money they earn before tax, NationalInsurance, superannuation and other deductions is subtracted from it.

Hire purchaseA type of credit whereby you 'hire' the item you are buying for a fixedperiod, during which time you pay for the item in monthly instalments, plusinterest. When the final payment is made, the item legally belongs to thecustomer.

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Executive Summary: Conclusions and Recommendations

IssueThe General Consumer Council has a statutory duty to promote and safeguard the interests of consumers.

ScopeThe specific focus of this report is personal credit and debt issues inNorthern Ireland.

MethodDue to the limited availability of up to date quantitative data in NorthernIreland, the General Consumer Council commissioned a consumer surveyof a representative sample of 1020 Northern Ireland consumers inFebruary 2004. This analysed consumers’ experiences with credit anddebt in Northern Ireland. Where possible, comparisons have been madewith similar studies conducted in Great Britain including the Government’sTaskforce on Over-indebtedness.

ConclusionsThe low interest rates and increasing house prices have resulted in moremortgages alongside increased consumer borrowing on loans, credit cardsand store cards. The cumulative impact of more credit facilities, higherdebt and higher percentage of gross income being spent on repayments isbecoming increasingly difficult for all consumers, especially those aged 35-49.

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Methodology

The Council commissioned a survey of a representative sample of NorthernIreland consumers in February 2004 to analyse the prevalence and type ofcredit used in Northern Ireland.

In total, 1020 respondents aged 16 and over were interviewed. The sample was quota controlled to be fully representative of the Northern Ireland population. Interviews were carried out face to face at 45 sampling points, randomly selected throughout Northern Ireland, affording a high degree of regional distribution.

The sample included 48 per cent males and 52 per cent females and the socio-economic groupings were as follows: ABC1 = 43 per cent; C2 = 20 per cent; DE = 37 per cent.

This survey relates to an individual’s credit and debt held in their name or jointly.

Socio-economic Groupings: The classification relates to the occupation of the head of an individual’s household.

ABC1: Professional and managerial and skilled non-manual

C2: Skilled manual

DE: Semi-skilled, unskilled and others

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Amount of Consumer Debt

Overall consumer debt including mortgages averaged £15,300 perrespondent; excluding mortgages, this reduced to £2,300 per respondent.

Consumers with mortgages were more likely to have higher levels of debt.The average debt for consumers with mortgages was £47,500 includingtheir mortgage and £5,700 excluding it.

This compares with Bank of England figures which show that on averageeach UK household owes around £7,000 to creditors and lenders, excluding mortgages.

Forty five per cent of respondents currently do not spend anything onrepaying loans or credit excluding mortgages; this reduced to 37 per centwhen mortgages were included. This means some consumers with mortgages do not hold any other credit commitments.

One in ten (10 per cent) respondents stated they spent more than a quarter of their gross monthly income repaying consumer credit and oneper cent of respondents spend more than 50 per cent of their gross monthly income repaying credit including mortgages. These consumerswould be at risk of overindebtedness.

Financial Capability

Only four out of ten (43 per cent) respondents were able to correctlyanswer that APR stands for Annual Percentage Rate in a credit advertisement. Although over half of respondents (53 per cent) answeredincorrectly or did not know, this shows a slight improvement from February2003.

Almost half of respondents (48 per cent) stated that if they found themselves in financial difficulty in the future they would contact friendsand family for advice with a further ten per cent not knowing where to go

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Consumer Attitude to Credit

Opinion towards credit was mixed; 43 per cent of Northern Ireland consumers believed credit was occasionally necessary, however, one third(34 per cent) of consumers deemed credit to be never a good thing.Almost half (45 per cent) of respondents believed they could afford morecredit but would prefer to avoid it; five per cent of all respondents believedthey have more credit than they can afford and needed to pay some off.

Half of consumers (50 per cent) in Northern Ireland stated they were keeping up with bills and credit without difficulties. This is lower than inGreat Britain. Similar questions there showed that 60 per cent1 and 56 per cent of consumers2 in Great Britain stated they were keeping up with commitments without difficulties.

Around one in ten (eight per cent) consumers in Northern Ireland stated they were constantly struggling to keep up.

Type of Credit Held by Consumers

The most widely used type of credit facility for Northern Ireland was a credit card (37 per cent) followed by a mortgage (34 per cent). However, more than one third of respondents in Northern Ireland (35 per cent) stated that they had no credit facilities at present.

Age was an extremely important factor as to whether consumers havecredit facilities with younger and older consumers the most likely to holdno credit commitments. Socio-economic grouping was another importantfactor. Fifty per cent of group DE had no form of credit, compared with 32 per cent of C2 and 23 per cent of ABC1.

Fourteen per cent of the survey stated they had four or more credit commitments.

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1 Over-indebtedness in Britain - a report for DTI by Elaine Kempson, PFRC, September 20022 Citizens Advice, Financial Over-Commitment Survey, July 2003

• An illustration of how an interest rate rise increases payments and the overall amount paid should be included on pre and post contract information as well as payment scenarios.

• Consumers should know how long it would take to pay off the commitment if only the minimum payment was made each month/quarter.

• All information should be accessible by all consumers. Therefore consideration should be given to the different accessibility needs of consumers who have visual or hearing impairments, have learning difficulties or do not have English as their first language.

• A minimum font size should also be introduced so information is clear for all consumers.

Responsible Lending

The Council believes there should be a duty on credit providers to lendresponsibly.

• Credit companies, particularly credit card and store cards companies, should not be allowed to automatically increase credit limits without anyrequest from consumers.

• An individual’s ability to repay the credit, as well as their existing creditcommitments, should be taken into account in assessing applications forcredit or for credit limit extensions.

• There should be full transparency throughout credit agreements. Any changes to interest, APR or other features should be clearly communicated to consumers.

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for advice. This highlights the need for trained and professional advice tobe more readily available and appropriately funded.

Recommendations

Government’s New Regulations on Consumer Credit

The Council welcomes the new regulations announced by the Departmentof Trade and Industry on 9 June 2004. The Council believes they will helpprovide a framework for more responsible lending in the credit industrywhile ensuring that consumers obtain better information to help them borrow more responsibly.

• The Government should ensure the new regulations are monitored and reviewed regularly to ensure that they are benefiting consumers. If not, further action should be taken to redress the imbalance.

Clear Information

The Council believes credit information needs to be clear, accurate andcomparable both before and after signing a credit agreement.

• Consumers should be able to make informed choices before signing a contract. The Council welcomes the voluntary introduction of summary boxes on all credit agreements. It is essential that the new changes are properly monitored and independently evaluated; a standardised formatacross the industry would allow consumers to make clearer comparisons.

• All APRs should be calculated using the same formula throughout Europe and include the same charges so that consumers are able to useAPRs as a clear basis for comparability.

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• Following discussions with the General Consumer Council, the Council for the Curriculum, Examinations and Assessment (CCEA) has acknowledged the impact of the increased levels of consumer spending in society and resultant debt problems. The Council recommends that CCEA take this forward as part of its current review of the curriculum.

• The Financial Services Authority and the General Consumer Council should continue to work in partnership to promote financial education inthe Northern Ireland curriculum through conferences and money management courses for the education sector.

More Help for Those in Trouble

The Council believes that if consumers are in financial difficulty or are having trouble making their credit repayments, they should be able toaccess free and impartial advice easily.

• Current specialist money advice and debt counselling services should be enhanced to improve access and availability throughout Northern Ireland.

• The Government and the advice sector must work together to make consumers more aware of what help is available.

• In addition, adequate resources are also required to increase provision of information and advice to help consumers avoid getting into debt in the first instance.

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• The Council believes that wealth warnings outlining the consequences ofmissing repayments should be included in all advertisements for securedlending in a clear and prominent place.

• There should be more specialised training of shop personnel selling credit agreements, including store cards and hire purchase agreements.

Responsible Borrowing

The Council believes that while lenders need to act ethically, consumersalso need to act responsibly when entering into credit agreements.

• Before signing a credit agreement consumers should assess their currentfinancial situation to establish whether they need the credit and if they can manage the repayments.

• Consumers should ensure that if they are taking out a new credit to replace existing facilities such as a new credit card, that they end existing agreements and close the previous account. By doing so consumers are not tempted to use both the old and new credit facilities.

• If consumers are considering settling a loan before the agreed time, they should ensure they understand all the costs involved before makinga final decision, as this can be expensive.

Improved Financial Capabilities

In order for consumers to borrow more responsibility, the Council believesthat further information, guidance and advice should be available to helpconsumers become more financially capable and keep up with a rapidlychanging financial environment.

• The Financial Services Authority is currently developing a National Strategy on Financial Capability. This will require clear objectives and guidance on how it will be implemented in Northern Ireland.

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1. Introduction

Consumer credit in the United Kingdom (UK) is booming and showing little sign of slowing. This month, the total consumer debt in the UK hit the£1 trillion milestone. Total lending to individuals grew by £11.2 billion inJune 2004.3 Excluding mortgages, Bank of England figures show that onaverage each UK household owes over £7,000 to creditors and lenderswith figures suggesting consumer credit in the UK is increasing at a rate of £1 million every four minutes. There is widespread unease over theincreasing amount of consumer debt and there is regular press coverageoutlining concern.

In what has been a decade of low interest rates, there has been a hugegrowth in consumer credit over the past number of years. However, theBank of England Monetary Policy Committee has increased the bank’s baserate four times since November 2003 (refer to Figure 1). This has led to aknock on effect as this has been passed on to consumers through highermortgage rates and interest rates on credit. Concerns exist that if the interestrates continue to increase many more consumers could find themselves indifficulty with repaying their credit commitments and may fall into debt.

Figure 1: Bank of England Base Rate January 2000 - July 2004

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3 Bank of England Statistical Release: Lending to Individuals, 29 July 2004

Financial Services Authority

• The Council believes the Financial Services Authority should improve its regional presence in Northern Ireland and in the longer term, establish a regional office given the particular variations in financial markets thatexist here.

• As previously stated, there needs to be clear guidance on how the forthcoming Strategy on Financial Capability will be implemented and delivered in Northern Ireland.

Over-indebtedness Strategy

• The Council welcomes the work to date on the Over-indebtedness Strategy for the United Kingdom. There needs to be clear guidance anddirection on who is responsible for the strategy locally and how it will be delivered and implemented in Northern Ireland.

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2. Consumer Attitudes Towards Credit

Overall Attitude to Credit

Respondents were asked about their overall attitude to credit (refer toFigure 2). The same question was asked previously in three surveys inGreat Britain.4 The attitudes towards credit have stayed relatively stablesince 1979 in Great Britain although higher levels of credit being regarded as never a good thing were recorded in 1989 (43 per cent).

Figure 2: Respondents’ overall attitude to credit

Attitudes to credit in Northern Ireland appear to be similar to those inGreat Britain. In Northern Ireland, only three per cent of respondentsdeemed credit to be a sensible way of buying in 2004. This compareswith six per cent of consumers in Great Britain in 2002. The most popularresponse in Northern Ireland related to consumers believing that credit was occasionally necessary (43 per cent). One third (34 per cent) of Northern Ireland consumers deemed credit to be never a good thing.

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Credit has now become part of many consumers’ everyday lives. The impact of credit on individuals can be very wide ranging. For manyconsumers credit is beneficial; they are able to make their repaymentswithout difficulty and reap the benefits of having extra disposable income.However, for some it’s a different story; for consumers who are unable tokeep up with their credit commitments or make their repayments, credit canbecome a major source of misery and despair.

The impact of debt problems on people’s lives has been highlighted inother recent qualitative studies carried out by Citizens Advice, NorthernIreland (In Too Deep, 2003 and Would you credit it, 2001), the WesternHealth Action Zone (InDEBTed to you, 2004), the Department of EnterpriseTrade and Investment and the Consumer Credit Counselling Service. The General Consumer Council also published Short Changed, which highlighted the difficulties many consumers faced in coping with credit ordebt problems. These publications highlight the human face of a growingproblem.

The Department for Trade and Industry (DTI) is currently reforming theConsumer Credit Act 1974 to update licensing regimes, to improve protection from unfair credit and to improve consumer redress. In October2000, DTI set up a Taskforce on Over-indebtedness to explore the causesand effects of overindebtedness and investigate ways of achieving moreresponsible lending and borrowing. Following on from this the Governmentpublished its Over-indebtedness Strategy in July 2004. The FinancialServices Authority is also developing a National Financial CapabilityStrategy with seven key projects.

Due to the limited availability of up to date quantitative data in Northern Ireland, the General Consumer Council undertook a survey of a representative sample of Northern Ireland consumers in February 2004.This analysed consumers’ experiences with credit and debt in NorthernIreland, and where possible, a number of comparisons have also beenmade with similar studies conducted in Great Britain including the findingsfrom the Taskforce on Over-indebtedness.

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4 Over-indebtedness in Britain - a report for DTI by Elaine Kempson, PFRC, September 2002

Five per cent of all respondents believed they have more credit than theycan afford and need to pay some off. One fifth (22 per cent) had as muchcredit as they believe they can afford, and wouldn’t want to increase it.This sentiment was higher for age groups 25-34 and 35-49 (30 per cent).

Almost half of respondents (45 per cent) could afford more credit butwould prefer to avoid it. Only five per cent of all respondents believedthey could afford more credit and would be happy to take out more.

A quarter (24 per cent) answered they simply did not know when askedtheir views on current borrowing levels. Older (65+) and younger consumers (16-24) were more likely to answer don’t know.

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There was a significant relationship between age and attitude to credit.Sixty three per cent of those aged 65 years or more deemed credit to benever a good thing compared with 26 per cent and 25 per cent of thosein the 25-34 and 35-49 age groups respectively. Therefore the two agegroups least likely to believe credit is never a good thing were the twogroups with the highest amount of individual debt.

Respondents were asked for their views on their current levels of borrowing. There was a significant relationship between the age of the consumer and their views (refer to Figure 3).

Figure 3: Respondents’ views on their current level of borrowing

*Percentages may not add to 100 per cent due to rounding to whole numbers

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cent7 and two per cent 8 stating they were falling behind with some commitments. Eight per cent of respondents in Northern Ireland did not know how they are currently managing financially.

There were also differences between different socio-economic groups andhow they believed they are managing financially at present. Sixty two percent of socio-economic group ABC1 stated they are keeping up with billsand credit without difficulties compared with 50 per cent from group C2and only 37 per cent from group DE.

At the other end of the scale 15 per cent of respondents from socio-economic group DE stated that they were constantly struggling orfalling behind with some commitments compared with four per cent fromgroup C2 and six per cent from group ABC1.

The two groups with the most personal debt tend to struggle the most (referto Figure 5): 40 per cent from the category 25-34 age group and 36 percent of respondents aged 16-24 years old believed they were keeping upwith bills without difficulties, compared with 69 per cent of respondentsaged 65 or over. No consumer aged 50 or over stated that they werefalling behind with some of their financial commitments.

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7 Over-indebtedness in Britain - a report for DTI by Elaine Kempson, PFRC, September 20028 Citizens’ Advice, Financial Over-Commitment Survey, July 2003

Financial Management

Half of respondents (50 per cent) in Northern Ireland stated they werekeeping up with bills and credit without difficulties (refer to Figure 4). Sixty per cent of consumers5 and 56 per cent of consumers6 in GreatBritain stated they were keeping up with commitments without difficulties in response to two similar questions.

Figure 4: How respondents described their current financial managementat present

One third of respondents (32 per cent) said they kept up financially butstruggled from time to time. Almost one in ten (eight per cent) respondentsbelieved they were keeping up but were constantly struggling. One percent of Northern Ireland respondents stated they are falling behind withsome commitments. This figure was higher in Great Britain with three per

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5 Over-indebtedness in Britain - a report for DTI by Elaine Kempson, PFRC, September 20026 Citizens Advice, Financial Over-Commitment Survey, July 2003

3. Type of Credit Held by Consumers

In order to establish the prevalence and types of credit available, respondents were asked what forms of credit they hold in their own nameor jointly (refer to Figure 6). The most popular type of credit facility held byconsumers in Northern Ireland was a credit card (37 per cent) followed bya mortgage (34 per cent). However, more than one third of respondents inNorthern Ireland (35 per cent) stated that they had no credit facilities atpresent.

Figure 6: Percentage of respondents with each type of credit facility

Type of Credit Facility Percentage of Respondents (%)

Credit card 37Mortgage 34Store card 18Mail order catalogue credit 16Personal loan from bank or building society 12Overdraft 11Hire purchase agreement 10Credit Union loan 8Student loan 3Loan from family/friend 3Secured loan/re-mortgage 2Unofficial loan/moneylender 1Don’t Know/no reply 2None 35

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Figure 5: How respondents described how they were managing financially at present by age

*Percentages may not add to 100 per cent due to rounding to whole numbers

Refused Credit in the Past

One in ten (9 per cent) respondents stated that they had been refusedcredit in the past with two per cent of the survey stating they had checkedtheir rating with a credit rating agency.

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The number of credit commitments each respondent held was alsoanalysed (refer to Figure 8). A quarter of respondents had only one creditcommitment, 17 per cent had two and 11 per cent of respondents hadthree. Fourteen per cent of the survey stated they had four or more creditcommitments. This means consumers must be able to budget and managetheir finances to ensure each commitment receives the right amount at theright time.

Figure 8: Number of credit commitments held

Number of Credit Commitments Percentage of Respondents (%)

None 35One 24Two 17Three 11Four or more 14

Credit Cards

Thirty seven per cent of consumers in Northern Ireland stated that they hadat least one credit card. In Great Britain, this is much higher, with 71 percent stating they have at least one credit card.9

In terms of age, more than half (51 per cent) of consumers in NorthernIreland aged between 35 and 49 have at least one credit card. This ishigher than younger or older consumers who were less likely to hold acredit card (refer to Figure 9). Again, this may be in part due to their lack of credit history or age, respectively.

A higher proportion of those from socio-economic group ABC1 (56 percent) also had at least one credit card compared with those from C2 (32per cent) and DE (17 per cent). This may be because consumers with lowincomes may find it difficult to gain access to the regular forms of credit.

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Age was an extremely important factor in whether consumers have creditfacilities (refer to Figure 7). The youngest and oldest age groups were leastlikely to hold credit commitments. Fifty three per cent of those aged 16-24and 67 per cent of those aged 65 or over stated they did not have anytype of credit at present. This may be explained in part by the fact thatyounger consumers may have difficulty gaining access to some of thefinancial products due to their age or lack of credit history and the likelihood that older consumers are more likely to have already repaidtheir mortgage and be beginning to limit their outgoings. Previous studiesin the UK and Great Britain have also found older consumers are less likely to hold credit facilities.

Socio-economic grouping was another important factor. Fifty per cent ofgroup DE had no form of credit, compared with 32 per cent of C2 and 23 per cent of ABC1. Seventy per cent of respondents in full time education held no credit facilities. The results also illustrate that different socio-economic groupings were more likely to have different types of creditfacilities. Consumers from ABC1 were more likely to have credit cards,mortgages and hire purchase agreements than consumers from groups C2and DE. Consumers from group C2 were more likely to have a loan froma Credit Union than those from ABC1 and DE. Consumers from group DEwere more likely to have a loan from family or friends compared with consumers from the other socio-economic groups.

Figure 7: Respondents with no type of credit facilities by age

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9 Office of Fair Trading, Credit Card Survey, March 2004

to March 2004, 587 actions for mortgage repossessions were recorded,an increase of 21.8 per cent from the same period in 2003.11 This is aworrying pattern because following the recent Bank of England base raterises, most mortgage lenders increased their variable mortgage rates thereby increasing consumers’ monthly payments. In addition, nearly onein four homeowners has never changed their mortgage and of those thathave changed, one in three stayed with the same lender.12 Figure 10 illustrates how a mortgage interest rate rise would affect a £70,000 mortgage.

Four per cent of the survey reported they had extended their mortgage,obtained a loan secured on the house or released equity to pay off existing debts or credit in the past.

Store Cards

Almost two out of ten (18 per cent) respondents had a store card inNorthern Ireland compared with 24 per cent of consumers in Great Britain.13 Females (24 per cent) were almost twice as likely to have thistype of credit than males (13 per cent). The socio-economic groupings also impacted on whether respondents held a store card; 29 per cent of respondents from ABC1 held a store card, compared with 15 per centfrom C2 and eight per cent from DE.

A snapshot survey carried out by the General Consumer Council in Belfast during November 2003 showed that, in the majority of cases, store representatives could not provide details of the monthly interest rateor the actual cost of credit offered on their store cards. The research alsorevealed that using a store card to buy an item at £500 could take over10 years to repay and could end up costing more than £1,000 if repaying using the monthly minimum payment (see Appendix A for a summary of results).

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Figure 9: Percentage of consumers that have a credit card by age

Mortgages

One third (34 per cent) of consumers surveyed had a mortgage. Fortyeight per cent of those who were married, separated or living with a partner had a mortgage compared with nine per cent of those who were single, widowed or divorced.

Again, age comparisons arean important factor with mortgages. Fifty two per centaged 35-49, ten per centaged 16-24 and six per centof those aged 65 or overhave a mortgage. In NorthernIreland, 1655 actions formortgage repossession wererecorded for 2002-03, anincrease of 7.5 per cent fromthe previous year.10 The numbers of repossessions are continuing this trend. For example, from January

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10 Department for Social Development - NI Housing Statistics 2002-2003, September 2003 11 Department for Social Development - NI Housing Bulletin, July 200412 Sainsbury’s Bank Research, November 200313 Citizens Advice, Financial Over-Commitment Survey, July 2003

Figure 10: How an increase in interest rateswould affect a £70,000 mortgage

Mortgage Annual Monthly Rate (%) cost repayment

4 £2,800 £233.334.25 £2,975 £247.924.5 £3,150 £262.504.75 £3,325 £277.085 £3,500 £291.675.25 £3,675 £306.255.5 £3,850 £320.835.75 £4,025 £335.426 £4,200 £350.006.25 £4,375 £364.58

The new Government regulations announced on 9 June 2004 will introduce a new method for calculating the amount payable if settling thecredit agreement early. Although it will outline a maximum figure whichcan be charged, borrowers will still be penalised for settling their loansearly.

Overdraft

When asked, only 11 per cent of respondents stated that they had anoverdraft facility. However, a quarter (25 per cent) of the survey stated thatthey have been overdrawn in the past year at least once while 10 per centof respondents were overdrawing on their current account at least once aquarter. Three per cent of respondents stated that they were always overdrawn (refer to Figure 11). If an overdraft facility has not been agreedby the bank or building society, it may result in significant costs for the consumer in bank charges, fees and interest. It may also indicate difficulties with financial management.

Younger consumers were more likely to be overdrawn than older consumers; 38 per cent of those aged 34 or under stated they had beenoverdrawn at least once in the past twelve months compared with 22 percent of those aged 35 or over.

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The Office of Fair Trading (OFT) has recently referred the store card industry to the Competition Commission for investigation. The OFT is concerned with the lack of transparency for consumers and the fact thatmany store cards have an APR of 10 percentage points above those available with credit cards. The Competition Commission is hoping to publish its final report in the summer of 2005.

Mail Order

A higher number of consumers in Northern Ireland (16 per cent) used mailorder catalogues than in Great Britain14 (11 per cent). As with store cards,females were more likely to have this form of credit with 22 per cent offemales stating they used mail order as a form of credit compared withnine per cent of males. The Department for Trade and Industry’s WhitePaper on the consumer credit market outlined mail order as one of themore expensive forms of credit along with doorstep collection companiesand pawnbrokers.

Personal Loans

Twelve per cent of respondents in Northern Ireland have personal loans.Men (15 per cent) were more likely to have this type of credit comparedwith women (nine per cent). Seven per cent of respondents stated that theyhad taken out one loan to cover all existing debts or credit, often referredto as a consolidation loan. Again, younger and older consumers were lesslikely to have a loan or consolidation loan; 19 per cent of consumers aged35 to 49 have a personal loan compared with one per cent of those aged65 or over and seven per cent aged between 16 and 24.

Consumers are entitled to settle loans or credit agreements at any time butif they settle before the end of the agreed term, the lender is entitled tomake a charge to cover the cost of ending the agreement. This provisionincluding the formula known as Rule of 78, used to calculate charges, canbe costly for consumers. Research has shown that as many as 70 per centof consumers repay loans early.15

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14 Citizens Advice, Financial Over-Commitment Survey, July 200315 Datamonitor, cited in the DTI White Paper, Fair, Clear and Competitive:

The consumer credit market for the 21st century, December 2003

Credit Union Loans

Eight per cent of respondents stated they currently held a loan from aCredit Union. Seven per cent of socio-economic group ABC1 and 7 percent of group DE had a loan from a Credit Union compared with 12 percent of group C2. Catholics (13 per cent) were two and a half times morelikely to have a Credit Union loan than Protestants (5 per cent).

The Irish League of Credit Unions, which includes Northern Ireland, recently stated that the size of the average Credit Union loan was €7,000(£4,695). It also reported that 37 per cent of all Credit Union loans werefor €750 (£503) and therefore they believed they were serving a niche ina market from which other financial institutions were withdrawing or cutting back.16

Student Loans

Only three per cent of respondents stated that they had a student loan. Again unsurprisingly, younger respondents were more likely to have student loans; nine per cent of those aged 16-24 and five per cent of thoseaged 25-34 had a student loan. No one aged 50 or over stated they hada student loan. Fifteen per cent of those still in full time education had a student loan compared with four per cent of those who worked full timeand two per cent of those who work part time.

The average graduate is now leaving university £12,069 in debt, according to the findings of the tenth Barclays Annual Graduate Survey.This represents a 10 per cent increase on the previous year (£10,997).Graduate debt has increased by 500 per cent since the survey began in1994, when average graduate debt stood at £2,212.17

Student loans were introduced in 1990. The main feature of the loan is that interest is calculated using the headline rate of inflation (RPI).Repayments commence once the loan holder reaches a certain level of income.

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Figure 11: How often respondents were overdrawn in the past year

Hire Purchase

One in ten respondents had a hire purchase agreement. More males (12 per cent) had this type of credit compared with females (9 per cent).Socio-economic group ABC1 (13 per cent) were twice as likely to have this agreement than consumers from group DE (7 per cent). Ten per cent of consumers from group C2 had a hire purchase agreement. There wasalso a relationship between working status and this type of credit facility;20 per cent of consumers working full time and 10 per cent of consumersin part time work had this type of credit compared with four per cent of consumers who currently were not working and two per cent of consumers in full time education.

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16 The Irish League of Credit Unions, Press Release: Credit Union movement growth on target as assets hit €11bn and membership tops 2.7 million, April 2004

17 Barclays Annual Graduate Survey, May, 2004

Case Study

Out of the Fire….

Chloe (not her real name) is a 21 year old single parent relying solely onstate benefit. Without the money to pay for a cot and pram for her baby,she could not get a loan at normal rates through mainstream bankingchannels as she is on benefit and is not a home-owner.

She bought the cot, pram and other goods through a friend’s catalogue in the friend’s name. Chloe fell behind with payments and the friend was putting pressure on her for payment as she was getting letters and telephone calls from the catalogue company. Her friend offered to introduce her to a moneylender, who called to her home and offered her £200, to be re-paid over 20 weeks along with interest of £79.

She missed some weeks, made 12 payments of £7.00 per week over 20weeks but still owed nearly all she borrowed. The collector kept calling toher home, sometimes three times a day and even at night. Chloe startedstaying out of the house, just walking the streets to avoid him.

A man who lived in the estate approached her asking if she needed a loan. He lent her £200 to be paid at £12 a week for 30 weeks. Chloe accepted without realising she was paying £160 interest. She paid off the first moneylender but has since found out there is para-military involvement with the latest loan shark.

Source: General Consumer Council for Northern Ireland, Short Changed, 2002

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Loan from Family or Friend

Three per cent of the survey had received a loan from family or friends.There was a relationship between socio-economic groupings and this typeof credit facility; six per cent from group DE had received a loan from family or friend compared with two per cent from group ABC1 and oneper cent from C2. Working status also was a factor; nine per cent of those in full time education had a loan from a family member or friendcompared with two per cent of those in full time work, as had four per cent of those working part time and three per cent of those currently not working.

The DTI Over-indebtedness Survey in Great Britain found that one quarterof households in financial difficulty had been lent or given money by theirfamily or friends, although the proportion increased to half of those inarrears with three or more commitments. It also found that loans from family or friends were especially common among young people, agedunder 25, who were in financial difficulty.

Unofficial Loans and Credit

One per cent of Northern Ireland respondents stated they currently had an unofficial loan or owed money to an unofficial moneylender. This mayunderestimate the actual numbers, as many people tend to be reluctant toadmit to borrowing in this way.

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Respondents were then asked if they knew the APRs of the credit facilitiesthey held. Consumers who knew what the APR was on their mortgage (27 per cent), main credit card (23 per cent), main store card (13 percent) or main loan (29 per cent) were in the minority (refer to Figure 13).

Figure 13: The percentage of consumers who knew the APR on theircredit agreements

Out of the four types of credit, respondents were more likely to knowexactly what the APR of their main loan was and were least likely to knowabout the APR of their store card. Six out of ten (57 per cent) store cardusers have no idea of the APR on their store card. If consumers do notknow the APR of their credit facility, they cannot know if they are getting a good deal.

The Office of Fair Trading research illustrates a similar picture in Britainwith credit card APRs. This research found that only 24 per cent of consumers in Britain knew the APR on their current or most frequently used credit card.19

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4. Knowledge of Annual Percentage Rates

Respondents were asked if they knew what the letters APR stood for in acredit advertisement. Only four out of ten (43 per cent) respondents wereable to answer correctly that APR stands for Annual Percentage Rate. Fifty per cent answered incorrectly or did not know. This shows someimprovement on a previous study by the Council in February 200318 whichfound that 35 per cent of Northern Ireland consumers answered correctly(refer to Figure 12).

A larger percentage of male respondents answered correctly (49 per cent)compared with 37 per cent of females. This was compounded by fortyseven per cent of females answering they did not know or had no ideacompared with 35 per cent of males.

Age was also an important factor, with the younger and older age groupsbeing less likely to answer correctly. Sixty per cent of those from ABC1socio-economic grouping answered correctly compared with 36 per centfrom C2 and 26 per cent from DE.

Figure 12: What do the letters APR stand for in a credit advertisement?

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19 Office of Fair Trading, Credit Card Survey, March 200418 General Consumer Council for Northern Ireland, Consumer Knowledge: Well, what do you know? 2004

Figure 15 illustrates the reasons why respondents actually chose their maincredit card. Most respondents (52 per cent) chose their card because theirbank offered it to them. Other influences on the decision were advice fromfriend or relative (eight per cent) or the card offering 0% introductory APR(13 per cent).

Figure 15: The reason why respondents chose their main credit card

Reason for Choosing Credit Card Percentage of Respondents (%)

Got one from own bank 52Advice of friend or relative 80% start up introductory offer 13Competitive long term interest rate 6Start up incentives 4High spending limit 3Cash back facility 3Loyalty points 2Liked appearance of card 1Linked to charity *Couldn’t get other cards *Other 10Don’t know/no reply 10

* Indicates less than one per cent

The Office of Fair Trading asked a similar question in Britain in March2004, where the most important factor for the largest proportion of cardholders was the interest/credit rate (38 per cent). Thirty six per cent of consumers in Britain stated they chose their particular card because their own bank issued it compared with 52 per cent in Northern Ireland.Eight per cent of respondents stated that they had taken out a new creditcard to transfer the balance from an existing credit or store card to get alower interest rate.

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5. Credit Cards: In Depth

Why Consumers Chose Particular Credit Cards

Respondents were asked how they heard about their main credit card.(refer to Figure 14). More than half (51 per cent) first heard about theircredit card from their bank. Fifteen per cent heard about their card by aleaflet through the post and 13 per cent did not know or remember howthey first heard about their main credit card. These results indicate consumers are applying for the first available card and therefore may not be shopping around for the best deal.

Figure 14: Where respondents heard about their first credit card

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The age of the consumer as well as their socio-economic grouping had adirect relationship on whether respondents paid off the full balance eachmonth for both credit and store cards. As age increases so does the likelihood of paying the full balance off their card each month. Sixty fourper cent of respondents aged 50 or over pay off the full balance of their credit card compared with 48 per cent of those aged 35-49 and 33 percent of those aged 16-34. In the case of store cards, 67 per cent ofrespondents aged 50 or over pay off the full balance compared with 56per cent of those aged 35-49 and 38 per cent of those aged 16-34.

Fifty three per cent of respondents from socio-economic grouping ABC1stated they paid off their full balance on their credit card each month compared with 39 per cent from socio-economic groups C2 and DE. With store cards, the difference between socio-economic groupings is more exaggerated. Sixty one per cent of respondents from ABC1 statedthey paid off their full balance on their store card compared with 37 percent of respondents from groups C2 and DE.

One third (32 per cent) of all respondents pay more than the minimumpayment but less than the full amount off their credit card each month compared with 22 per cent with a store card account. One per cent ofrespondents paid less than the minimum payment on average each monthoff credit card and store card balances, indicating possible difficulties withfinancial management or lack of awareness.

In a recent report by the Department of Trade and Industry, the formerdirector of the Credit Card Research Group calculated the length of time it would take to clear a £3,000 balance on a card with a monthly interestrate of 1.313 per cent. It was estimated that it would take nine and a halfyears to clear if the minimum payment was 5 per cent.21 Therefore it wouldtake longer if the minimum payment was lower.

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Minimum Payment of Credit and Store Cards

Respondents with credit and store cards were asked how much, if anything, they usually paid off their balance each month (refer to Figure16). Just under half (48 per cent) said they paid off the full balance of their credit card each month.

Eleven per cent of respondents just pay the minimum payment off theircredit card compared with 14 per cent paying the minimum payment offtheir store card.

Slightly more stated that they would pay the full balance off their storecards (53 per cent) each month. These findings were consistent with thosefrom Great Britain.20 Females (53 per cent) were more likely to pay the fullbalance off their credit card compared with males (43 per cent). This wasalso the case with store cards (55 per cent and 49 per cent respectively).

Figure 16: The amount paid off credit and store card balances on average each month

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20 Citizens Advice, Financial Over-Commitment Survey, July 2003

*Percentages may not add to 100 per cent due to rounding to whole numbers

21 Cited in Over-indebtedness in Britain - a report for DTI by Elaine Kempson, PFRC, September, 2002

Credit to Make Ends Meet or Pay Regular Bills

Respondents were also asked had they ever used credit to pay householdbills or to make ends meet (refer to Figure 18).

Three quarters of the survey (75 per cent) had never used loans or creditto pay regular household bills. Twenty per cent had used credit to pay regular household bills. Again, age was a major factor. Thirty per cent ofthose aged 35-49 had used loans or credit to pay regular household billsin the past compared with seven per cent of those aged 16-24 and 11 percent aged 50 or over.

Eight out of ten (79 per cent) respondents never use loans and credit to make ends meet until the next payday, benefit or pension payment. Only 17 per cent of respondents had used credit to make ends meet.

Again, age and social class were important contributing factors; 70 percent of those aged 25-49 had never used credit to make ends meet compared with 81 per cent of those aged 16-24 and 90 per cent of thoseaged over 50 years of age. Those from social grouping ABC1 (20 percent) were more likely to have used credit or loans for making ends meetcompared with social grouping C2 (14 per cent) and DE (13 per cent).

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6. What credit is Used For

The most popular item purchased on credit was clothing (29 per cent) followed by holidays or travel (20 per cent) and electrical goods (19 per cent) (refer to Figure 17).

Figure 17: What respondents used their credit to pay for over the past year

Yes No Don’t Know(%) (%) (%)

Clothes 29 68 3Holidays/travel 20 77 3Electrical goods 19 77 3Food 15 82 4Mail order 14 83 3Furniture 12 84 4House improvements 9 88 3Cars 8 89 3Moving home 2 95 3Wedding 1 95 3Other 1 8 91Funeral * 96 4

* Indicates less than one per cent

More females (32 per cent) bought clothes with credit over the past yearcompared with males (25 per cent). However, males were more likely topurchase cars using credit compared with women (ten per cent and six percent respectively).

The results revealed that more respondents aged between 24 and 49 hadspent their credit buying the items outlined in Figure 17 compared withthose from the other age groups. This was also the case for respondentsfrom socio-economic group ABC1 compared with those from C2 and DE.

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Percentage of respondentsIncluding mortgages

398373461516

Excluding mortgages

4513413531115

7. Amount of Consumer Debt in Northern Ireland

Respondents were asked to estimate how much they would owe including their mortgage and excluding their mortgage (refer to Figure19). According to the Bank of England, on average each UK householdowes over £7,000 excluding mortgages.22

Forty five percent of respondents stated they owed nothing excluding mortgages and 39 per cent said they owed nothing including mortgages.Fifteen percent of respondents owed £40,000 including mortgages withtwo per cent owing £100,000 or more. These figures may increase, particularly for first time buyers, as house prices continue to increase in Northern Ireland.

Figure 19: The amount of money owed by respondents

Estimated amount of money owed

NothingLess than £500£500-£999£1,000-£4,999£5,000-£9,999£10,000-£19,999£20,000-£39,999£40,000+Don’t know/refused

Overall consumer debt including mortgages averaged £15,300 perrespondent. Excluding mortgages, this reduced to £2,300 per respondent.The average debt for consumers with mortgages was £47,500 includingtheir mortgage and £5,700 excluding it.

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Figure 18: Respondents who used credit to make ends meet or to payregular household bills

In Great Britain, seven per cent of consumers always used credit to pay regular household bills, with 40 per cent of consumers using credit for thispurpose in the past. Four per cent of consumers in Great Britain alwaysused credit to make ends meet and twenty per cent of consumers had usedcredit in the past as an interim measure until the next pay day, benefit orpension payment. These figures are higher than in Northern Ireland. Also, no respondents in Northern Ireland said they always used credit for making ends meet or paying regular household bills.

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22 Bank of England Statistical Release: Lending to Individuals, 29 June 2004. Total lending of £993 billion divided by the number of UK households of 24.48 million (UK Census, 2001) gives an average household debt of £7517 excluding mortgages.

Figure 21: The percentage of gross monthly income spent on repayingcredit

*Percentages may not add to 100 per cent due to rounding to whole numbers

Forty five per cent of respondents currently spend nothing repaying loans or credit excluding mortgages. This reduced to 37 per cent whenmortgages were included. Sixty nine per cent of respondents spend lessthan 10 per cent of their gross monthly salary on repaying consumer creditexcluding mortgages. Almost half of respondents (48 per cent) spend lessthan 10 per cent of their gross monthly income on consumer credit including mortgages.

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Males had a higher amount of cumulative individual debt compared withfemales both including and excluding mortgages. The age comparisonswere very significant. Those aged 25-34 had the highest average totaldebts including mortgages of £25,600, followed closely by those aged 35-49 (refer to Figure 20).

Figure 20: The estimated amount of debt owed by age category

Percentage of Gross Monthly Income Spent on Credit/Debt

Respondents were asked to calculate the percentage of their gross monthlyincome spent on repaying loans and credit (refer to Figure 21).

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8. Consumer Financial Advice

Almost half of respondents (48 per cent) stated that if they found themselves in financial difficulty in the future they would contact friendsand family for advice (refer to Figure 22). Younger respondents (77 percent of those aged between 16 and 24) were more likely to contact theirfamily or friends for advice compared with older respondents (43 per centof those aged 25 or over). In many cases, this may not be the most beneficial source of contact due to the nature and complexity of the financial services sector.

Twenty eight per cent stated they would contact bank or building societypersonnel, 19 per cent stated they would contact their local CitizensAdvice and 5 per cent said they would contact a free advice agency.In Great Britain23, these contacts were more popular with 42 per cent stating they would seek advice from bank or building society advisers and 34 per cent stating Citizens Advice. These organisations offer animportant service for consumers, providing specialised advice and support.

One in ten (nine per cent) consumers in Northern Ireland did not know where to go for advice if they were in financial difficulty. This increased to 17 per cent of consumers who were aged 65 or above. The NorthernIreland situation compares poorly with that in Great Britain where two percent of the sample stated they did not know where to go.24 This indicatesthat consumers in Northern Ireland are less aware of the help available to them.

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23 Citizens Advice, Financial Over-Commitment Survey, July 200324 Citizens Advice, Financial Over-Commitment Survey, July 2003

Only three per cent of respondents stated they spent more than a quarter of their gross monthly income on consumer credit repayments excludingmortgages. When mortgages were included, one in ten (10 per cent)respondents stated they spent more than a quarter of their gross monthlyincome repaying consumer credit. One per cent of respondents spent morethan 50 per cent of their gross monthly income repaying credit includingmortgages. A large proportion did not know or refused to answer whatpercentage of their gross monthly income was spent on repayments. The age of the respondent again was a factor. Thirty seven per cent ofthose aged 25-49 stated they spent more than 10 per cent of their monthlygross income repaying credit and loans including mortgages with 13 percent of those aged 16-24, 21 per cent of those aged 50-64 and two percent of those aged over 65 years doing the same.

Over-indebtedness

In the second report by the DTI’s Over-indebtedness Taskforce, it is stated that differences in individual lifestyles, attitudes and other financialcommitments will mean that a level of debt which is manageable for oneindividual or household may be unmanageable for another. It is thereforedifficult to establish a clear definition of over-indebtedness, that will hold in all cases. However the report does outline a strong link between thenumber of credit commitments and the proportion of income being spenton repaying credit and the likelihood of being in arrears. It suggests a reasonable guideline of over-indebtedness as

• Having four or more current credit commitments• Spending more than 25% of gross income on consumer credit or • Spending more than 50% of gross income on consumer credit and

mortgages

A credit commitment is defined as outstanding consumer borrowing. It does not include mortgages (which are included in household bills) nor credit or store card balances which are unused or paid off by the due date.

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Source: Department of Trade and Industry’s Second Report by the Task Force on Tackling Over-indebtedness, January 2003.

Northern Ireland

4828198541111339

Great Britain25

4642342413128221312

Figure 22: Where respondents would go for advice if they found themselves to be in financial difficulty in the future

Where consumers would go for advice

Family/friendsBank/building society personnelCitizens AdviceIndependent financial adviserFree advice agencyAccountantInternetCredit reference agency/credit reportFree charging debt management agencyCredit repair agencyNoneOther please specifyDon't Know

*Percentages may add to more than 100% due to multiple responses

These findings highlight the importance of Government ensuring that adequate provision is made for money and debt advice. This would ensurethat services are in place to help those already in debt and advise otherson how to use credit wisely and avoid getting into debt.

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25 Citizens Advice, Financial Over-Commitment Survey, July 2003

A25.9% APR variable1.94% per month

£781.00

£281.00

6 years 5 months

B32.9% typical APR2.21% per month

£873.00

£373.00

7 years 5 months

C29.9% typical APR2.21% per month

£1,038.00

£538.00

10 years 5 months

Appendix A

General Consumer Council Store Card Research November 2003

The Council calculated how much it would cost and how long it wouldtake to pay for a £500 item using various store cards available at threehigh street stores (refer to Figure A for the results).

Figure A: Cost and length of time it would take to pay for £500 itemusing different store cards

Total payments

Total interest paid

Time taken to pay for item if paying monthly minimum

The Council also carried out further telephone research in Belfast. Nineindividual stores were contacted by telephone and were informed that wewere looking for information about their store card. Eight out of the ninestores could state what the APR was. However, one store quoted an APR of 1.71 per cent instead of 27.8 per cent.

The stores were asked if they could provide further information. Eight out of the nine stores could not send out information and in four cases they were advised to contact their local store. Only two stated that theyhad a leaflet but again this was only available if you physically wentinto the store.

Taking the CreditConsumer Credit and Debt in Northern Ireland

Elizabeth House116 Holywood Road

Belfast BT4 1NY

Telephone/Textphone:028 9067 2488

Fax:028 9065 7701

Email:info@gccni.org.uk

Websiteswww.gccni.org.uk

www.consumerline.org

ISBN: 1 871095 45 X