“credit cards are fine, as long as you always pay them off in full”

At the time, I didn’t recognise it as financial advice. But, you know, I have always paid my credit card in full (apart from those times that I’ve made a late payment - I’m not very organised), and it’s been a good habit and trait. And I don’t pay off my credit card in full because it’s sensible to do so (even though it is). I pay it off in full without thinking because that’s what you’re supposed to do.

I should probably re-examine some of the other messages that I follow unthinkingly though. Who knows what kind of stupid things I’m doing, just because someone told me as a kid.

I just had a phone call from someone I haven’t actually met, about an amateur music event I’m going to next week. The cheque that I sent him has bounced. He was very nice about it, and just said to pay on the day.

I was too surprised on the phone to work out what had happened, thinking about it now, there are two options. The first is that my inability to sort out my finances properly meant that there was no money in the account. This is not likely because this guy said that he’d just received a letter from the bank, which implies that he put the cheque in within the last few days. I was only paid a week ago. But if this is the case, then obviously, I’m too blame.

The second option is almost completely not my fault. I paid for this thing weeks and weeks ago - sometime towards the end of August. Since then, my house was broken into and  as I was concerned that one of my chequebooks had been stolen, I  had them all cancelled. So, the cheque - which wasn’t cashed straightaway - would have been declined. Apart from possibly having a better idea of which cheques still had to be paid, I’m not sure that there’s very much that I could have done to prevent this.

Rubber cheques are not nice, even if they’re probably not your fault.

During a bubble everyone pays over the odds for some commodity, believing that the *fundamentals of the market have changed*. The correct response is of course that *no they haven’t*, at least not by that much. Anyway, when the bubble bursts, the thing that everyone was paying ridiculous amounts of money for, they now won’t touch with a barge pole.

When the tulip bubble burst in 1636, the bulbs became worthless almost overnight. Even the really pretty ones. Now, I don’t know if you’ve been to a gardening centre lately, but they don’t exactly give away tulip bulbs. They aren’t even the cheapest bulbs you can buy - especially the variegated ones that caused the bubble in the first place. After prices have become overhyped, the market corrects goes a bit too far (everyone hates to lose) and eventually they find a stable value.

In this case, the things that have been overvalued is certain types of debt. People paid too much money for debts, and now they don’t want to pay any money for them at all. It gets a little bit into head-splitting territory because there are negative numbers floating all over the place, but essentially paying too much money for a debt is equivalent to charging too little interest on it and/or loaning the money too freely. Similarly, not wanting to pay any money for debts is equivalent to charging high interest on it, and/or refusing to loan money at all. This is the situation now.

What does this mean?

As far as high finance and the banking system goes, I wouldn’t have a clue. But maybe I’ve got some ideas about how it might affect ordinary people.

I suspect that for some time it may be more difficult to take out any form of loan. This means it will be harder to get a mortgage, a car loan, a credit card, a personal loan or an overdraft. What can we do?

• save up a bigger deposit
• provide more proof of income for loans (e.g. wait until you’ve done your tax return)
• keep on top of credit scores and reports
• keep up to date with loan repayments
• inform your bank etc at the first sign of a problem
• live within your means

We all know anyway that consumer debt is bad. It’s always a great time to pay off excess debt and now is no exception. A lack of available credit shouldn’t affect too many sensible personal finance people. If you’re hoping to buy a house in the near future, or take out a car loan then you need to be more careful about your credit report - make sure it’s accurate and don’t incur any unnecessary dings on it. You should also have more income documentation especially if you’re self-employed and it can’t hurt to have a bigger deposit saved up.

As soon as you think that your debts might start to become a problem contact your bank / credit card company etc and explain. Anecdotal evidence suggests that they are less accommodating than they used to be, but they are always more helpful if you approach them sooner rather than later.

Finally, living within your means is the golden rule of finance. Not needing any debt is extremely helpful if debt is hard to come by.

But, what does this mean for the people like us?

Well, I think if you’re being sensible financially, then it will probably turn out ok.

If you work in the finance or property industries then you might want to polish up your cv. On the other hand, it won’t hurt anyone to polish up their cvs as long as they don’t do it on works time. I’m keeping an eye on what’s going on in my industry, which I think should be pretty much ok for the time being, you might want to do the same.

If, like me, you bought at what I’m now certain was the top of the property boom then the chances are that you are stuck with the house for a while. I hope you like it. My tactic is to maintain sensible-ness. The house I bought needed cosmetic work which I’m slowly doing as I can afford to. I’m not paying extra on the mortgage at the moment as I can get a better rate on my cash ISA, but if and when that changes, I’ll consider paying down the mortgage further to try and stave off the risks of negative equity.

If you need to sell your house, then be prepared not to get the amount that it was with a year or two ago. Take the best offer you can actually get, not the one that you think you should get. It’s eminently possible that you won’t get enough to cover the mortgage, particularly if you bought recently. If that’s the case, you have my deepest sympathy, but I’m afraid that the mortgage you took out bears no relation to what the house is actually worth now.

If you haven’t bought, but you would like to in the next couple of years, the biggest problem you have currently is that it has become much harder to qualify for a mortgage. This will affect you the most if you are self-employed, and you may well need to produce tax returns and accounts. But, everyone thinking about buying soon should be saving as large a deposit as possible (reduce your loan-to-value number) and maintaining an impeccable credit score. Once you’ve got a mortgage arranged, hold out for a good deal, buyers are like hen’s teeth at the moment.

In a similar vein, it’s much harder to get a loan than it used to be. Fortunately you’re all sensible people, and you don’t need a loan, except maybe a student loan (which is not subject to commercial rules) or a loan for a car if you must. Anyway, keep on top of your credit record and credit score, make sure your cards are paid off and that you generally look in excellent financial shape.

Most of us should be savers and investors. You are saving and investing, right? Well, the stock market isn’t doing so well at the moment, but that’s ok because we are not day traders, we are in it for the long haul. I’ve set up my regular investing plan and I’m sticking to it. I suggest you do the same - if you want help understanding stocks and shares ISAs, you could check out my basic guide to stocks and shares ISAs. If there’s any requests, I’ll try and do something similar for pensions at some point.

As for your savings, if you have any spare cash in your budget you might want to add it in to your savings account, which should really be on auto-magical. The only important thing to remember is the insured limit. If a bank goes under, then all your money below the insured limit is protected and safe, otherwise you have to take your chances. Currently, in the UK the insured limit is £35k per bank.

Finally, review your insurance provisions. Do you need unemployment insurance? Have you got enough household contents cover? What would happen if your car was stolen, or you were burgled? Do you need to bump up your emergency fund to cover the excess/deductible?

On the other hand, in your own personal circumstances, when is it a good time to take on debt? And should you take into account the external market?

taking on a mortgage

About 18 months ago, I put in an offer on a house. I had just received a windfall that meant that I had enough money for the deposit and fees. I had a good mortgage offer - a 2 year fixed rate deal at 5.48%. My personal life was stable, I had a good job, had plenty of experience of living on my own, and was ready to commit to living in this area for the next 5 years or so. Personally, it was a good time to buy.

On the other hand, if you’d asked me then what I thought was likely to happen to the housing market, I would have suggested that it was probably nearing a peak. I thought that interest rates were likely to go up, and I didn’t particularly think that this was a good time to buy, if you were looking that the market.

I bought anyway. I didn’t like where I was renting, I didn’t want the expense of moving and then moving again in a couple of years. I was slightly worried that I might fritter away the windfall. I wanted to live somewhere that made me happy. I wanted a place of my own to decorate.

Although I got an ok deal on the house, with the benefit of hindsight I probably spent about £5k more than I needed to - the market wasn’t moving as much as I thought. It took nearly 6 months for the purchase to complete. It was quite stressful, and although now I really, really like my little house I’m aware that there’s an excellent chance that it will fall into negative equity in the next year or two.

other debt

Taking on a mortgage isn’t the only debt that you might incur where your personal circumstances and market forces might not be in sync. Now might be an excellent time to return to study for you personally, but is it a good time to be leaving the job market? If you’re trying to change or upgrade your career, what will the market for that be like in a couple of years time?

There’s probably never a good time to take on consumer debt really, but what about buying a car. If you need or want to get one now, you’re likely to find that interest rates are higher than you might like.

Should you postpone purchase that require debt until market conditions are better? Or should you put your own needs and circumstances ahead?

In England and Wales liability for debts is independent of a couple’s married or unmarried status. You are no more responsible for your husband’s debts –whenever they occurred – than you are for anybody elses. And of course, the same is true for your wife’s debts.

However, you are both liable for any joint debts. In particular if you take out a debt agreement with joint and several liability then not only are you jointly responsible for the debt, but if one of you disappears then the other is responsible for the whole debt. I suspect that many joint debt agreements are of this form.

Similarly husbands and wives are taxed independently – a fact that you can and should use to your advantage. Each has separate personal tax-free allowances, and separate ISA allowances.

There are some things that change if you get married. Inheritance law makes provision for husbands and wives but not for unmarried partners. Pensions may provide benefits for surviving husbands or wives, but not necessarily for partners. An unmarried couple is also treated differently in adoption law. Some of these differences can be overcome with a little work (e.g. creating a will), and others cannot (pension rights).

An important thing to remember is that there’s no such thing as a common law spouse in England. It doesn’t matter how long you’ve lived with someone, you don’t automatically get any rights.

Note that throughout I’ve referred to husbands and wives. The same rules apply to same sex marriages, which are called civil partnerships in British law. This is not a definitive explanation of the legal positions involved - always do your own research, plonkee money is provided for entertainment purposes only.

On the other hand, one of the things that is widely available in the UK is alcohol. Not only is it widely available, it is also used and misused by all sorts of people. Really, quite a lot like credit cards. I use both.

Alcohol is a dangerous substance. Lots of people misuse it, by binge drinking to excess, and cluttering up A&E departments in hospitals with alcohol poisoning and drunken accidents, or by drinking and driving (IMHO an almost completely inexcusable crime), or by becoming addicted to alcohol.

Credit cards are dangerous. Lots of people misuse them by, making payments late and getting fees, or running up debts that cost them a fortune to clear.

On the other hand, a small glass of red wine a few times a week is good for your health. And a cashback credit card, with the balance always paid off in full, is good for your wealth.

You can, of course, go without one or the other relatively easily. You don’t need to drink alcohol to celebrate momentous occasions, to relax with friends - even in the pub, or to enjoy gourmet food. You don’t need a credit card to make purchases online, rent a car, or build a credit history.

But, just like there’s no replacement for the sensation of champagne bubbles on the tongue, or savouring a pint of excellent beer, it’s harder to replace a credit card for some transactions - particularly those where it represents trust.

If you don’t drink alcohol, whether because you have been physically addicted to it, or some other reason that’s fine. If you don’t use credit cards, whether because you have previously had a problem with them, or you just don’t want to, that’s also fine. You’re a grown up, I respect your ability to make your own decisions.

What’s not fine is projecting on to everyone else. Your fear that you will be unable to use credit cards sensibly (which may well be perfectly justified) shouldn’t be applied to everyone else. They may know that they can use them sensibly. Just like your dislike or fear of alcohol (which is generally a reasonable one) shouldn’t be applied more widely than yourself. Other people are grown ups who can make their own decisions too, and those decisions can be different from yours.

For me, I use credit cards all the time and have never run up major debts, don’t carry a balance, and only spend money that I already have. I strongly suspect that I’m not the only person in the world able to do so without a problem.

Image by Gaetan Lee

I wrote just the other day about a slightly random conversation that I had with someone who had declared bankruptcy a few years ago.

I’m very strongly of the opinion that bankruptcy is necessary for a good economy. Without it, it becomes impossible for people to take business risks and individuals can become mired in debt from which there is no hope of escape.

I am aware that some people think that you have a moral duty to repay the money you owe, as you agreed in the first place. I disagree, and think that as far as commercial credit is concerned, it has nothing to do with morality, but is simply a contract drawn up within the law of the land - which generally includes provision for bankruptcy.

when is bankruptcy a good idea?

When there is no way that you will pay off your debts in your lifetime, regardless of the actions that you take (e.g. you can’t even repay the interest on what’s owed let alone any of the capital) then bankruptcy is likely to be the only solution to your problems.

If you’re forced into bankruptcy by the taxman or by your creditors, then it is by default the way that you are going to have to go.

In general though, you should declare bankruptcy only if it’s in your best overall interests to do so - and people generally need help to find that out.

why bankruptcy is good for debtors

If you are made bankrupt, it’s almost always as the result of crippling debt. People often have the bailiff demands, phone calls from debt collectors and general hassle that can lead people into depression. This is not good, and being made bankrupt is one way of stopping that. Improving the mental health of people is definitely a useful side-effect of bankruptcy laws.

Also if you are made bankrupt - at least in the UK - you are forced to live within your means, and denied access to credit. If you’d never learnt how to do this before, you’d have to now. This period lasts for a couple of years, and in addition, if you can afford to repay some of what you owe then you will have to.

your reactions?

I strongly suspect that most people who read plonkee money, have never been made bankrupt, probably will never need the protection of bankruptcy and are perfectly sensible with their money. This is good. But what is your reaction to bankruptcy?

Given the rules of polite society, if someone tells me that they, or their friend of relative, has been made bankrupt I would feel rude expressing anything other than general muted support. But in addition to being the polite response it’s the one that most fits my own opinions.

It’s true that some people are serial bankrupts. They are doing themselves no favours at all, and probably shouldn’t be given credit by financial organisations. I can’t bring myself to condemn someone who is, in the long run, punishing themselves.

It seems likely to me though, that most people learn from the experience (possibly eventually). And after all, there are lots of people that struggle with debt, learn from it and go on to be financially successful - in fact a bunch of them are fellow personal finance bloggers. Everyone makes mistakes, and most of us make mistakes with money.

Does this mean that I think it’s ok to run up massive debts?

Err no. Actually it’s the running up of debt that’s the problem - and any subsequent burying of heads in sand. Once the debt is there, any method of tackling it that leads to sensible boring finances and works is just fine with me.

I don’t expect everyone to agree, but whether you do or not, please let me know in the comments.

Image by helmet13

Last weekend I was staying with some friends by the seaside, and whilst we were out I ended up chatting to one of the group, Amy, about my house - which I bought last year. She stated that she was rubbish with money, to the extent that a few years ago, she’d been made bankrupt.

The details of the story are that she ran up £25k of credit card debt in her very early twenties, whilst earning a salary of something like £15k. After talking to a friend who’d been through bankruptcy she decided it was the best option for her, went to court and was made bankrupt. She was put on a payment plan of £100 per month for three years - this was the spare money that she had after basic expenses and could afford to repay to her creditors.

I admired her frankness, although I was then stuck with what to say. I told the truth, which is that I think there is nothing wrong with being made bankrupt - for businesses it’s a cost of providing credit which they should be allowing for. She said that although she’s now eligible for credit she no longer takes it up, and whilst she’s still perpetually skint (not a well-paid job, living in an expensive area), she’s debt-free.

I don’t know whether I conveyed my admiration well enough. I made (for me) the mistake of saying “it’s ok if you don’t do it every year”. I know that she’s right. Bankruptcy isn’t for everyone, but for some people it’s the best way to relieve their debts. It would have been for her as she couldn’t have even payed the interest on £25k, and she had little immediate prospect of a better paid job. Once bankruptcy has been discharged, you can carry on your successful life, hopefully a little wiser for the experience.

If I knew someone in real life who was facing massive debt I’d probably try to put them in touch with her. There’s nothing like hearing personal experience to try to reassure them that there is life after crippling debt, and that bankruptcy isn’t an insurmountable obstacle in the quest for a happy, fulfilled, and eventually rich life.

Yesterday, when I explained about Dave Ramsey’s debt snowball, I said that the biggest drawback is that you end up paying more by paying off your debts in order from smallest to largest, than you would if you paid them off in order of highest interest to lowest interest.

Now, unlike Dave Ramsey, who is hot on psychology, arguably the biggest finance guru in the UK, Martin Lewis - the Money Saving Expert, is all about the maths. If he made over your finances, he’d never have you paying off your debts smallest to largest, instead he’s pick the more rational choice to pay them off highest to lowest interest rates. Funnily enough, I’m pretty sure that Martin has never had a debt problem.

What if you could make it so that the smallest debt also had the highest interest, and the largest debt also had the lowest interest?

Then it hit me, that’s the outcome you’re aiming for when you use Money Saving Expert’s credit card shuffle. You can have all the psychological advantages of the Dave Ramsey method, whilst still getting the financial rewards of paying off higher interest debts before lower interest ones. And it doesn’t mean that you take on any more credit.

The time to do this is once, at the beginning when you’re setting up your debt snowball. (If you’ve already set it up, you might want to revisit it to see if you can save money with this technique.) You’ll need a list of all your debts together with total amount of each debt, the interest rate and the credit limit.

the credit card shuffle

Mostly, this works better with credit cards and overdrafts than it does with other loans - you need to check the terms of your loan to see if it will be worthwhile.

step 1: ask them to lower their interest rates

This is easy. All you need to do is call up each credit card company and ask them to lower the rate. They might just do so. If they do, make a note of the new rate.

step 2: find out about special deals

Whilst you’re on the phone to the credit card company trying to get your interest rate lowered, ask them if they have any special balance transfer offers for new customers - if there are, write those down as well.

step 3: the shuffle

This is the more complicated step. The idea is that you move your debt from the higher interest cards (or overdraft) to the lower interest cards.

Suppose you have 3 credit cards and an overdraft:

1. Visa £1k balance, £3k limit, @ 6.9%
2. Amex £2k balance, £4k limit @ 12.5%
3. Overdraft £2.5k, £2.5k limit @ 13%
4. Mastercard £4k balance, £5k limit @ 17.9%, (lifetime balance transfer deal @ 9%)

Here, we want to get as much debt as possible onto the Visa, then the new balance transfer from Mastercard, then the Amex, then the overdraft then finally, the old rate on Mastercard.

Firstly lets start by moving the most expensive debt onto the least expensive card.

• transfer £2k from the Mastercard to the Visa

The Visa is now full up, but we still have £2k on the Mastercard. We can’t put this on the new offer, but we can put this on the Amex.

• transfer £2k from the Mastercard to the Amex

At this point we have no debt on the Mastercard, and the Amex is full. The final steps in the shuffle are to use the special balance transfer offer transfer.

• transfer £2.5k from the overdraft to the Mastercard (new balance transfer rate)
• transfer £2.5k from the Amex to the Mastercard (new balance transfer rate)

After the shuffle we are left with:

1. Visa £3k balance, £3k limit, @ 6.9%
2. Mastercard £5k balance, £5k limit @ 9%
3. Amex £1.5k balance, £4k limit @ 12.5%
4. Overdraft £0k

The smallest balance has the highest interest rate, and the larger balances have lower interest rates. Everyone’s a winner (except the credit card companies).

Now, if you think that it sounds too complicated, on the Money Saving Expert site you can download a credit card shuffle worksheet to help you. Also, you only have to do this once, when you set up the snowball. Finally, even doing a little bit of a shuffle will save you money in the long run, and get you out of debt more quickly.

Hot or Not? Let me know what you think in the comments.

Image by The359.