Friday, January 09, 2009

Intensive care for your finances

Closed Green Door to Intensive Care Unit
Closed Green Door to Intensive Care Unit

The new financial climate

Living within your means and repaying some debt is going to be a difficult action to take and yet to safeguard where you are at the moment action will be vital.

Our financial situation can be compared to a critically ill patient and although just about out of intensive care, there is a lot that is needed to help towards a recovery.

If you have no idea where you are financially it is important to take stock and make a list of all your assets ( savings, property, cars, belongings, stock and shares etc) so that you can accurately see where you are.
Next make a list of all your debts, credit cards, store cards, car loans, home extension loans etc. Hopefully your assets will be higher than your debts otherwise you will be technically insolvent.

If you need any advice at this point about debt, go and see your local Citizens Advice Bureau and ask to see one of their debt counsellors. Do it as soon as possible as I am almost certain that there will be delays in the future to see a person immediately.

The reason businesses are closing down and staff are being made redundant is because banks need to readdress the hole in their balance sheets. They do this by contracting lending and reevaluating the debts they have and it is vital in order to stay solvent that you do the same. Why, will make sense later in the post.

I am going to concentrate this post on credit cards as my first focus. The reason for choosing the credit card is because it is one we have a certain amount of control over in the way we use it and it is also the first one that will show signs of cracking up . Get all your credit cards lined up next to one another and get your statements out. This will provide you with the following information. What is outstanding, what your credit limit is and what interest rate you are being charged.
There will be differences. The most important thing in this financial climate is not to start flashing as a risk on your banks computer. It is important that you pay a little more than the minimum due on each card as paying the minimum will show up as a person with a possible problem. Next look at the cards that have the highest interest rate and create a plan to pay off on a regular basis as much as you can. When that one is paid off, use the money available to pay off the remaining. Seeing a debt counsellor will give you an idea of what loans and debts are important and which ones are not. A credit card is an unsecured loan and although the banks cannot do much to recover the debt as such they are likely to do the following if you show up on the risk monitor. First and foremost,to cut their debt exposure it is feasible that your credit limit will be lowered which then increases the percentage of debt you owe on the card. Lets say you have a card with a £ 5000 credit limit and you owe £ 2500. That would be a 50% debt and you are paying 5% of your balance each month. When the bank cuts down the credit limit to £ 2500 then you are faced with a maximum credit card limit debt, i.e. 100%. That increases your risk to the bank of defaulting on your card. Next you may see that interest rates change to a higher figure because you are considered a higher risk. It is therefore vitally important to keep an outlook on what is happening with your credit card debt as it will influence your credit rating and give you a way to monitor your financial health as seen by the banks. Protecting your credit rating will be a vital element in the future. It may be an option to transfer your credit card debts to one card but you need to seek advice about that, see above.

As disclaimer I want to say that I am not a financial adviser but the above is an assumption of how I see banks are likely to react to the current financial deficit on their balance sheets. We can see that they are not lending to businesses, which in turn means that many businesses have their overdrafts cut or recalled forcing them into administration, which in turn leads to redundancies, loss of jobs etc etc. As businesses struggle with this concept at the moment and readdress their balance sheet, the individual bank customer is likely to be next in line.

As with a flu epidemic, avoid exposure, then have treatment available at home.

Our financial patient may be out of immediate danger but we must protect vital organs in order to avoid a complete breakdown.

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