Plan for things to get tougher before they begin to get better

Published on Friday 13 November 2009 19:43

THE cost of credit cards is about to rise because of increased numbers defaulting on their debts, according to a report out earlier this week.

The survey revealed that up to 9 per cent of all outstanding balances may be defaulted on by the end of 2010, up from around 3 to 4 per cent in the "good times".

For the card companies, of course, this is effectively a loss which they will transfer to their existing customers. The result will be higher interest rate charges for existing customers on their credit cards and the possibility of an annual fee simply to have a credit card.

The banks have also stated in recent times that we are facing the end of free banking. Costs have risen and they need to extend their margins and boost their balances, so this is likely to lead to an increase in the costs of everyday banking for the majority of the population.

In addition, the Financial Services Authority (FSA) has called for a ban on self-certification mortgages and loans. While this system has undoubtedly been misused in the past, a ban is likely to result in many borrowers being left high and dry when their existing deals run out. Unable to get a new mortgage, yet unable to sell due to the flat property market, they will have to find increasingly larger payments for their property that they are unlikely to have planned for or be able to afford.

There is no doubt that the free and easy times of readily available credit have vanished – if not forever, then at least for the foreseeable future and certainly for the next three to five years. The result of all of these increased costs will be more people facing financial hardship for many years to come. It is essential, therefore, that people put their houses in order sooner rather than later. Better to build in cost increases of 10 per cent now than try to face them when they actually occur a year or so hence.

People in serious debt – typically those unable to meet their existing requirements from their monthly income – need to take advice and take action immediately. There really is no time for delay as the situation will get worse over the coming months. Those with debts they believe they can manage should consider clearing all debts as quickly as possible. The current low interest rate cannot last, and when it starts to rise many people who have felt less affected by the recession so far will realise just how expensive their mortgage can be. Given that they might also find it difficult to get a new mortgage at a good rate, individuals need to start preparing for serious increases in mortgage costs.

All of this means that while you can still have a merry Christmas, it may need to be a frugal one. A lot of people are starting to believe that good times may be just around the corner and that the recession is over. However, I believe we may be in for a period of several years of fairly flat, or minimal, economic growth – the good times are still some way off and we should be prepared for a difficult few years.

&#149 Bryan Jackson is a corporate recovery partner with accountants and business advisers PKF.