Friday, 30 March 2012

It’s not the credit that is dangerous; it’s the way it is used….

Earlier this week I was invited to a Convenient Credit and Consumer Protection Symposium. Part of what I have been doing is to try and get financial education into schools, this desire or passion came from the idea to educate people around the use of financial planning. When I started to look at this I discovered that we can’t educate people on financial planning when actually many people don’t get the basics of managing money.

In this journey I have met many people and realised that culturally the UK has already hit rock bottom when it comes to financial education. In the eighties I took an exam called commerce, in that exam I learnt the basics – so things like what a bank account was, how to write cheques and also the idea of hire purchase. When I left school I met with the bank manager who talked to me about budgeting and my first credit card had a limit of just £500. Now all of that has gone. What worried me was one of the comments I heard where a report is due to come out which says that financial education in schools makes no difference. So do we just give up because certainly that was the impression this person gave.

This attitude I think is supported by governments both past and present, Labour did nothing to drive through the FSA paper on Financial Education and the letters I have had from Number 10 and the Department for Education show a total lack of interest.

The symposium for me was a real eye opener and I want to share a couple of things which show why financial education is so important.

Convenient Credit

When I look back to the old days and say how much better it was, there is one thing that was really bad and that was door to door lending. Most of this was illegal and caused pain for many families. This hasn’t totally gone but it has been replaced by high cost credit. High cost credit is classed as home credit, payday loans, pawn broking and rent to buy retail credit.

Many people who are on low incomes have no choice but to turn to the fastest, most convenient and most flexible way of lending. Unfortunately these can be expensive.A dditionally many people who turn to short term and small amount of debts use something called rollover whereby they borrow more to pay down the previous loan and then it spirals.

I was amazed to hear that 68% of low income families turn to these types of loans because when an emergency occurs they have no spare cash so have to turn to lenders. If we shut the door to this type of lending then we go back to the bad old days. In fact payday loans come from the US and we can start to see the experiences that they have had coming into this country.

In the US there was concern that pay day loans were out of control and one state actually banned them, the result was that they saw a greater spike in bounced cheques and families falling behind on rent.

We tend to be judgemental (and I will put my hands up on this) but actually we need to understand why they are used, and by whom. The other point was that we fix ourselves on ensuring consumers are given all the small print but actually it is often written in a way that even the most intelligent person in the world could not understand.   We also seem keen to show the APR which is quoted as 4,000% for some loans when actually to try and work this is out is practically impossible. (To be fair some unauthorised overdrafts have an APR of 8,000%!)
What most people understand is figures so £100 over 30 days will cost you £130 to pay back.

What it goes back to is that it is not the credit that is dangerous, it’s the way it is used. We need to go back to educating people about the different types of credit, and what it means. We need to move away from complex words and make it easy to understand and we need to help people to budget. I now agree that to remove these types of loans will hit those who are most vulnerable.

Irresponsible Lending

How this rings true, lending is important to the economy and the last government loved it because it boasted the economy but if you build your castle on sand it will collapse and that is what happened. This governments desire to build more homes has the potential to create the same problem. One person I spoke to said that from an early age we are attuned to  debt, the student loans, the potential for nursery fees as a loan etc but I think we need to be careful.

From the late nighties onwards there was irresponsible lending which the banks indulged in, the politicians loved it and the general public accepted with open arms. There seemed to be no care for repayments just a desire to have a shiny new toy. Now we are keen to blame the banks and take no responsibility ourselves for the mess.

Some figures (I love figures) from report in July 2009:
  • Credit card providers had issued over £8.8 billion in unrequested credit to customers
  • Approximately 5.7 million people had their credit limit extended without providing consent
  • The average increase in credit was £1,538
  • The overall average credit limit increased from £5,129 to £6,667
In January 2012 the outstanding personal debt mountain stood at £1.456 trillion.

Banks did do NINJA lending – no income, no job, applicants – but the general public accepted this as the norm.

The point is we need a balance between credit and debts, the problem is the swing has gone too far towards debt and this is dangerous. Student loans are not a problem if you understand about them but the problem is that many don’t.

It goes back to education, from the late nineties we seem to have forgotten everything we learnt and thought it would last for ever. We need to rebalance between credit and debt and financial education plays a key part in this. 


If we go back a step, it’s not the credit that is dangerous, it’s the way it is used – whether the government show a lack of interest in financial education or not, or schools fail to give time to this because they are worried about results we cannot just sit back and say well that is the way it is because if we do we are in trouble. We cannot expect to educate people on how to save and invest if they cannot even understand the basics of money management. 

This is why financial education is one of the most important policies and yet governments past and present cannot and will not see this because they are short term in their thinking (5 year elections).