Personal finance education can help reduce debt

A new report has said more personal finance advice for families on low incomes could help them avoid debt problems.

The report concludes that the key for low-income groups to maintain healthy finances is education.

The Would you credit it? report, written by Paul Jones of Liverpool John Moores University, states that increased education should help consumers avoid debt traps and high annual percentage rates (APR) offered by some products on the alternative credit market.

Buyback stores are one feature of this alternative market. They provide pawnbroking deals that, in some cases, can generate APRs in excess of 1,000 per cent.

Mr Jones said that educating people could have a domino effect in helping to put a stop to bad credit and debt practises, as it prevents people from choosing the wrong option.

He explained: "Our research shows that many people on low incomes rely on word-of-mouth advice from family and friends, which can be inaccurate.

"By training people in the local community with basic knowledge of financial services, we can hopefully help eliminate the myths and unrealities that often exist."

Simon Williams, of The Co-operative Bank, asserted: "In this day and age, it is just not acceptable for low-income consumers to be paying interest rates in excess of 1,000 per cent APR.

"Yet, shockingly, our research shows that people only seem to be concerned with the weekly cost of paying back the loan and make little reference to the APR, which surely underlines the need for education.

Steven Timms, the financial secretary to the Treasury, welcomed the report's findings on improving financial education.

Mr Timms stated that the Government was well aware of the lack of credit options for those on low incomes and was working to improve the situation.

"The Government is committed to tackling financial and social exclusion, for example, through the creation of the Financial Inclusion Taskforce and a £120 million Financial Inclusion Fund," he said.

Citizens Advice director of policy Teresa Perchard, added: "We want to see more affordable credit options developed and more transparency from lenders about the real cost of borrowing.

"Reform of the consumer credit laws and the new financial inclusion fund are essential steps in trying to make sure that people on low incomes can avoid being ensnared by extortionate credit deals and unmanageable debt.

"We also need to see reform of the social fund so that it becomes a more progressive and supportive option rather than a stigmatising and inflexible last resort which too often rejects applications for grants and loans from people in the most desperate need, leaving them to borrow at very high rates elsewhere."