Here’s a fact of financial life. Strangers who lend you money will have a method of getting it back. Mainstream lenders have the method of not lending to you unless you can afford to repay. Illegal lenders – such as unlicensed door step lenders or drug dealers – have ways of encouraging you to repay which you’d be much better off not finding out about. But what about payday lenders?
One answer is by pestering, making phone calls many times a day, and generally becoming a nuisance. Another is more technical, to do with the banking system.
Payday lenders usually set up a recurring payment on the borrower’s debit card. This isn’t a direct debit arrangement, though it can seem like one. It’s called a continuous payment authority or CPA. If the lender is unable to get money out of the borrower’s account on the due day it can try again later. In fact, it can keep trying and trying until, one day, there’s money in the account and the lender grabs it. This can cause problems for the borrower, who’d allocated that cash to go towards a priority debt.
What’s more, the lender might take a larger sum than agreed, perhaps the whole of the outstanding debt not just the instalment that’s due.
So it makes sense for the borrower who realises they are in financial trouble and doesn’t want to make it worse, to cancel the CPA with the lender. They can then come to some more manageable arrangement to pay back what they owe, without causing other problems.
But CPAs are hard to cancel. Banks have been saying it isn’t up to them to cancel them – that must be done by the lender. And anyway, the lender sometimes sets them up again, even after they’ve been cancelled.
But it is still a difficult area and one that everyone should know about. It’s also worth knowing that other organisations, such as gyms, use CPAs to collect money. The Money Advice Service explains more about payday loans, and sets out alternative borrowing options. They also produce the painful-looking graphic above, which is a good visual reminder of the perils of payday loans.
Could you get together a group of young people interested in devising and running a money management project? If you can persuade an adult from some learning organisation to sponsor your idea, register your interest in the Money for Life project.
Assuming that the project runs as it has in previous years, applications will be invited from September to November. Successful projects – over 250 last year – will receive £500 to turn their plan into a reality.
This year’s winners Bouncing Babies, pictured, ran a support group for young mothers on money management from their college in Lisburn, County Antrim. This and all project reports are showcased for inspiration.
Do you know a young person who has trouble spending money? Laugh at the idea, by all means. After all, the miser has been a figure of fun since classical Rome. But while financial education generally focuses on the perils of overspending and irresponsible shopping, there’s a seldom-discussed problem at the other end of the spectrum. That’s underspending and financial hoarding.
I was introduced to it many years ago when an adviser at a young people’s debt project told me about a young man who’d put his life on hold after an early experience with debt. He’d lost any sense of proportion about what money was for. All he had was a determination to part with as little of it as possible.
How do you get national media to take notice of your school National Record of Achievement ceremony? Tower Hamlets students seem to have cracked it. You just turn up in a Ferrari. Or a Lamborghini or a Bentley or whatever flash car you can hire or borrow.
The Evening Standard, the Guardian and countless more websites and newspapers are showing pictures of enterprising 16 year olds whose prom-style leavers-do has grown more and more elaborate in recent years.
As 16-year-old Foyzur Rahman told the Standard: “It’s showing off, basically. Playing music, going from area to area to area.” He said he paid £400 with a friend to rent an Audi S4 for several days.
Students doing summer jobs used to be able to sign a form P38(S) and have their earnings paid without deduction of tax. Not any more. In April, PAYE started operating in real time. Standard PAYE now applies to all students. More will need to claim back tax at the end of the year.
There’s a useful summary in Guardian Money explaining what those with a vacation job should do. The gist of the advice, which actually applies to everyone in work whatever their age or circumstance, is:
Get yourself a tax code. Understand what it means and why it is what it is.
Check your payslip and coding notices and make sure they match and that you agree with them.
One thing worth adding is that there is a benefit to overpaying tax while you are working at a summer job. It means you get a neat lump sum sometime in the future when it could be most welcome. So don’t necessarily think of it as an annoyance, more as a convenient way to save.
She had fame, success and a lot of money. Now she can’t pay her debts. She’s handed her money and property over to the official receiver. She lives on a basic income without luxuries.
Why mention her? Because she, and a fair number of other celebs who acquire fortunes and lose them, are an object lesson for young people. They illustrate the stark, perhaps surprising, truth that you can never have so much money that you don’t have to bother about it.
Some teenagers scorn the idea of money management. Phrases like, “I’m going to be famous” or “When the band gets its break, I won’t need to worry about money” are quite common. Fair enough, you can reply. But fame and success don’t reduce the need to understand and manage money. They increase it.
Here are two bonkers arguments for financial education in schools. The first is from Mark Garnier MP, vice-chair of the all-party parliamentary group for financial education for young people. He told the Financial Times earlier this month, “We need to make sure the next generation are financially literate. Compulsory financial education could avert the next financial crisis.”
Almost as ridiculous is the view of Andrew Percy MP, who chaired an eight-month inquiry for that same parliamentary group. He told the Daily Telegraph that financial education would be a long-term solution to irresponsible borrowing and personal insolvency.
To get a glimpse of how absurd these views are, think first about the general numeracy levels across the UK. A report last year suggested that 17 million adults, virtually half the working population, have numeracy skills that you would expect from primary school children. Mmm.
Then think about teenagers in general, and what they tend to know about, say, different financial products, their purpose and relative advantages. What’s their take on packaged bank accounts as opposed to no-frills current accounts, for instance? What do they see as the main advantages and flaws of permanent health insurance? Are they up to speed on the difference between defined benefit and defined contribution pension schemes and do they have a view about the level of equity and overseas growth funds they might want in their mix? Thought not.
Bearing in mind young people’s baseline capabilities, and those of the older generation, imagine what transformation of knowledge, skills and attitudes would be needed to equip them to “avert the next financial crisis”. I know some financially astute people who took out an Equitable Life pension. Many local authority accountants deposited money in Icelandic banks that went bust. Numerate and well-educated people took out endowment mortgages that failed. Would they all have fared better if they’d had financial education at school? Or take Libor fixing. How might the future cohorts of financially-capable school leavers have averted that? Would concerned citizens have so loudly expressed their hunch that manipulation of the interbank lending rate was going on that MPs would have forced the authorities into action? Really?
Then there are the financial products that caused the credit crunch and our current woes. Those are the collateral debt obligations, credit default swaps and structured investment vehicles that were scarcely understood even by the people who created and sold them. The credit ratings agencies gave triple-A ratings to worthless mortgage-backed securities. Regulators didn’t see anything amiss worth taking action on. Are the MPs imagining that financial education in schools will somehow bring the population to a level of financial acumen and integrity that exceeds that of the best minds in our financial institutions, ratings agencies and regulatory bodies? What kind of fantasies are these?
In the case of personal insolvency, the fantasies seem rather sick. Picture someone who’s lost everything because their partner ran off, or they developed cancer or their business failed – or all three. Suggesting that their problems lie in their inadequate education is insulting and ignorant.
So why are the MPs saying this stuff? They may be so carried away with their enthusiasm for financial education that they lose perspective and make giddy remarks. Or they may have an ideological belief in a free and unfettered market of financial products whose principal safeguard is empowered and educated consumers. Either way, their arguments are daft and dangerous.
An economist who has analysed gift-giving isn’t impressed. “An orgy of value destruction and misallocated resources,” is what Prof Joel Waldfogel, author of Scroogenomics, calls it.
The problem is that when we buy for ourselves we have, or ought to have, a reasonably good notion of what the value is to us compared with the price. If something costs £30 we buy it only if we consider that it has at least £30 worth of satisfaction to us, preferably more.
That breaks down when it comes to buying for others. We don’t really know what other people like or what they already have. So there’s a risk that the recipient of our gift wouldn’t value it as high as the asking price. Of course, we could be lucky and get it right. But more likely we won’t. We could use our hard-earned cash to buy something that the recipient would not have spent a penny on.
That’s the problem that Waldfogel identifies. He’s costed it as a waste of $25 billion a year.
So what do you do instead? Gift cards is one answer. But given that only 90 per cent of them get redeemed, that’s an awful lot of waste too. And when retailers collapse, as Comet did recently, they can become worthless.
So is it back to unromantic cash? Perhaps. But Waldfogel does give an element of hope. Buying presents for people you know well is much more likely not to be a waste. The real problem comes when buying for people who you see seldom and don’t know very well. So then the advice boils down to making sure you ask your Gran or distant relatives for cash. But you’d probably figured that out anyway.
Money management training works. It can sound dull. It can be hard to persuade people onto training courses and programmes. But once they’ve had a taste of it, they’re often converted. Here are two videos that capture some of the enthusiasm from participants who’ve grown in skills and confidence.
The first is from a one-day simulation run in schools by an education company, Ambitious Minds. Called Keep the Cash!, it challenges students to discuss their aspirations, agree a lifestyle, then make it sustainable, while juggling home and jobs, income, debt and cash flow. Just like adult life.
“Sorry mate, I’ve only got a £20 note.” No problem, I’ve got change. Marc the Big Issue seller was happy to sell a magazine to a friendly-seeming stranger. He wasn’t happy when he tried to spend the note. It was a forgery, worth nothing. That was his day’s earnings gone.
Young people are great users of cash. Even so, they are not very likely to come across a forged note. They are relatively rare and don’t circulate for long. Just under 250,000 counterfeit £20 notes were taken out of circulation last year. Which sounds a lot, but not as a proportion of the 1.6 billion genuine £20 notes in circulation. Perhaps Marc was targeted as a vulnerable person, assumed to lack the confidence or knowledge to check a note.
Key things worth knowing about bank notes
What are you supposed to do, legally, if someone tries to give you a forged note, in change or for payment? Similarly, what is likely to happen to you if you try using one in a shop?
What are the security features signs of genuine £5, £10, £20 and £50 notes? How can you quickly identify one?
Answers to these are supplied in the Bank of England’s rather old-fashioned public information video, Take a closer look. It’s 15 minutes long and not very zappy. A good activity for groups of young people might be to distil the key information into a faster, slicker and more memorable format – a rap, a poster or whatever suits.
See a quick summary of the key points, below the video.
Summary of key points
It is a criminal offence to pass on or even hold onto a counterfeit note. If you have one, hand it to the police as soon as possible. You’ll get a receipt. If someone tries to give you one, explain that you think it is counterfeit, give the person a receipt and pass it to the police.
Each value note is slightly different but all have raised print that you can feel, a metallic thread, a watermark. precise print quality, a hologram, microlettering visible under a magnifying glass and a number that appears under ultra-violet light. The £20 and £50 notes also have a see-through register forming a £ symbol and the £50 has a motion thread woven into the paper.