Financial Times

It's time to lock into fixed rates

Alexander Jolliffe, February 6, 2004

Robert Manning, a professor of business at Rochester Institute of Technology in the US, worries about consumer debt.

Many of his students borrow thousands of dollars to finance their studies, and credit card companies regard undergraduates as prime marketing targets. While he worries most about the US, Prof Manning also takes an interest in the UK and his advice about handling loans applies equally to Britons. He was in this country last month to give a lecture at Birkbeck College, London. Since then, the Bank of England's monetary policy committee has raised its base rate by a quarter-point to 4 per cent, effectively increasing mortgage bills for homeowners and buy-to-let landlords.

The increase comes after debt has risen to record levels, in absolute terms and as a proportion of income.

The Financial Services Authority, last month said it was aware of a rise in the use of credit cards to withdraw cash, which could be an early sign of financial stress. The City regulator also said that many homeowners hoped to remortgage if interest rates rose - apparently showing that they did not understand that mortgage rates would go up too.

Against that background, Prof Manning speaks with conviction about the need for borrowers to pay back more of their debts than lenders require, and to choose loans with fixed interest rates that cannot go up as central banks increase the cost of debt. "Paying a bit more down on your mortgage is a guaranteed return," he says. Borrowers should insure against rises in the cost of debt by choosing mortgages with fixed rates, he adds. Asked what he would say to borrowers who choose variable rates because they are initially cheaper than fixed rates, he says they are risking higher payments soon, and should not try to outwit investors who influence interest rates. This would be dangerous because long-term interest rates do not stay unchanged until after short-term rates have changed and, in any case, consumers rarely have a better understanding of the yield curve than the financial markets.

"Is there anyone saying that interest rates are going to go down? The average person shouldn't be a market timer. The global bond market is pricing in that these [cheap, variable rate] mortgages won't exist soon, so why is the average Briton taking variable rates? What would a 1 per cent increase in rates do to your personal finances?

"The only people who get variable rate mortgages in the US are those who can't qualify for fixed rates." He has sold his rental properties in the light of the expected rise in interest rates, but says some Britons are investing in the US property market: "I've seen a surge of investment in rentals by Britons: you see flights filled with them."

As for credit cards, Prof Manning advises borrowers always to pay back more than the minimum required by lenders. Of course, it makes sense to overpay on the most expensive debt first. Borrowers should also find out about the way that lenders view them by getting a copy of reports held by credit reference agencies such as Equifax ( and Experian (

He accepts that people do not like talking about debt. But he argues that borrowers who fail to control their loans could suffer emotionally. Debts contribute to divorces, and widespread problems with credit erode trust - in the US, women hire investigators to examine potential husbands' finances or at the very least get reports about their loans.

One part of helping people get on top of their debt is educating them, he says. "Young people will have to make a good educational decision [about what to study, and which university to go to.] Then they will have to make a good career decision, then be good at personal finance; and then they're going to have to be savvy investors. You'll be darn lucky to get them all right," he concludes, adding that education would help.

To provide such education, he designed an online "debt zapper calculator" to help students manage their debt. He believes that US credit card companies target undergraduates after their first two years at university. At that stage, colleges decide that students are unlikely to study elsewhere, so they stop paying financial aid - "And that's when the credit card companies come in."

He believes that when people borrow prudently, credit improves their standard of living. But for some US borrowers, debt turns nightmarish when they go bankrupt. Prof Manning, who has interviewed many borrowers who declared bankruptcy, says the financial collapse brings with it acute social stigma: "They're ashamed. They couldn't tell their families, they were fearful that word would get out in the office."

He sees the credit culture throughout much of US society. Borrowers can even pay tax bills with credit cards - paying Uncle Sam on the never-never, as it were. But while credit cards can be convenient, it has risks: "Instead of having savings to fall back on in time of emergency, people have credit." Then if they lose their jobs or even do not receive an expected bonus at work, they hit trouble.

Those who do run into problems should be careful about where they get advice about handling their problem: some debt management companies exist to serve the interests of their founders, not the borrowers, he warns. Such disasters are a far cry from the advertisements for debt. They conjure up images of enviable holidays in Tahiti, he says - without making the point that it might rain while travellers are there. Then there are the financial consequences of debt.

"People think: 'If I'm in debt, at least I'm having fun.' I'm saying: 'if you're out of debt, you can start investing - and that opens up a whole new range of possibilities." He says that when he makes an investment, he thinks: "That's three hours that I won't have to work when I'm 60."

Robert Manning, who last June gave evidence about consumer debt to a committee of the US House of Representatives, is the author of Credit Card Nation: The Consequences of America's Addiction to Debt.


This story ran on Financial Times on February 6, 2004.