Managing debt at a time of record inflation

For anyone struggling to manage their debts, the inflation news on August 12th was not good – the CPI (Consumer Price Index) had risen from 3.8% in June to 4.4% in July.

Is 4.4% really high?
This jump marked both the highest CPI figure and the largest monthly increase since CPI records began in January 1997. According to the Guardian, the last time inflation was higher was in April 1992, when it hit 4.7%.

What does high inflation mean?
First of all, it means things are quickly becoming more expensive – at the moment, by an average of 4.4% per year. The prices of some things, of course, are growing much more rapidly than others.

Second, it means the Bank of England (BoE) is much less likely to cut the base rate (the rate which lenders look at when they’re deciding how much interest to charge). That’s because cheaper borrowing can encourage people to spend, which can drive inflation up – and the BoE is trying to get the CPI back down below 2%.

What exactly is CPI?
The Consumer Price Index is the official way of measuring inflation – but some people say it’s not an accurate way of doing this. The Telegraph, for instance, publishes a ‘Real Cost of Living Index’ (RCLI), which includes ‘petrol and diesel, mortgage and council tax, which are excluded from the CPI official measure of inflation’.

According to the Telegraph, the RCLI is 10.8% – more than twice as much as the official CPI. For people who are struggling to manage their debts and cope with a rapidly increasing cost of living, this 10.8% figure might sound more in line with the price rises they’re seeing.

How can I make my money stretch?
Many people in debt were already using every penny of their monthly income to pay the bills and manage their debt repayments. Rising prices mean that some will have to re-organise the way they’re repaying their debts.

Debt management could be a good way to do this, freeing up the money they need to cope with the rising cost of living. There are two basic kinds of debt management:

• Some people ask a debt management company to talk to their creditors, asking them to accept lower monthly payments, freeze interest and waive charges.
• Some people talk to their creditors themselves, rather than asking a debt management company to do it for them.

Either way, a debt management plan can really help borrowers stay in control, even if it means their debts take longer to pay off (as they’re being repaid more slowly). When creditors agree to accept lower payments, freeze interest and waive charges, this can make it a lot easier for borrowers to clear their debts at a rate they can actually afford.

Why debt management?
Debt management isn’t the only debt solution. A debt consolidation loan / mortgage, for example, is another way of reducing monthly debt repayments and freeing up money for other things, but the credit crunch is making it hard for some people to access any further credit. Debt management, on the other hand, doesn’t rely on access to more credit – it’s about renegotiating the terms on existing debts.

Is debt management right for me?
If you’re looking for a way to reduce your monthly debt repayments, you should discuss your situation with a debt adviser before you make any firm decisions. They may suggest a debt management plan, a debt consolidation loan, or a different debt solution altogether, such as an IVA (Individual Voluntary Arrangement).