Tips for Better Credit Card Usage

Credit cards can be a great financial aid, but like any form of borrowing they have to be used well to avoid problem debts as well as to simply make sure that your credit is as cost-effective as possible. Here are a few ways you can optimise your credit card spending:

Don’t Use Them Unnecessarily

A credit card is not free money. It is not even a free “advance” on money you are going to repay later – unless you have 0% on purchases and repay before this expires of course. It is very easy to underestimate interest and the cost that it represents in real terms, writing it off as “a little bit extra” on each repayment. However, interest can mount up a lot more than most people realise over time. Keep your credit card for the times where you need it, or can see a clear benefit in using it.

Don’t Maintain Debts Long-Term

Managed properly, credit cards are a fantastic source of short- and medium-term borrowing, but over time they can really get costly. Recent research from the FCA has shown that well over a million consumers are maintaining debts for several years and making only the minimum repayments. The financial regulator was concerned at the cost of interest, as well as the lack of help available from lenders. Aim to clear your debts as soon as you reasonably can and not maintain debts longer-term.

Switch When Introductory Deals Run Out

Like many services such as insurance, credit cards are something you should switch regularly. Introductory offers such as 0% periods can be great, but the price increase when these offers run out can be steep. The simplest solution is simply to take out a new card with a new introductory offer, transferring any remaining balance at the most favourable rate you can. When you take out a new card, make sure you actually cancel your old one rather than simply ceasing to use it. Not doing so can harm your credit rating, as it looks to lenders like you are juggling multiple cards.

Use it in Place of More Expensive Finance

One place where credit cards excel is in replacing more expensive finance options. For example, a credit card, if available, will be astronomically cheaper than most payday loans. Alternatively, there are other situations which we might not think of as borrowing but, really, are. For example, do you pay for your car insurance or road tax in instalments? If so, you are effectively being offered finance, and the total you pay will be more than if you had paid in a single lump sum. If you pay it in full using a credit card with a year or more of 0% on purchases, then you can spread the cost without paying extra by paying off your credit card balance in instalments over the same period.

Taking Out a Loan: Important Things to Consider

The difference between a problem debt and a useful financial tool can sometimes be whether you have made the right considerations before taking out a loan. Some of the most important things to consider are:

Alternatives

The first thing to think about is whether you really need to take out credit. Because of interest, you will end up repaying more than you borrow (with 0% credit cards being the most prominent exception), and usually the difference will be significant. That is how lenders are able to make money after all. If you could afford to use your own money to meet whatever expense you are faced with and would just prefer not to, you may want to think again as you will be better off in the long run. If you have any other alternative available, such as borrowing from a spouse or close family member, this may also be preferable. The more strain a loan is likely to put on your finances, the more important this step becomes. If you will have trouble making the repayments, or if it will leave you with little spare income for unexpected expenses, the more taking out a loan should be considered a last resort.

Types of Loan

If you have decided that a loan is your best or only option, the next step is to think about what kind of credit you wish to take out. This can make a huge difference to the kinds of interest rates that are available to you and therefore the amount you repay in the end. To take an extreme example, payday loans – which are almost always something to avoid – could come with an interest rate of well over 1,000% but the same amount may be available with a longer repayment period through a 0% credit card. In between these two extremes are things like “standard” personal loans and peer-to-peer loans.

Shopping Around

Always shop around for the best rate. Even within a single kind of product, interest rates and repayment terms can vary massively, so there is a lot to be gained from getting the best deal. As with insurance products and utility providers, online comparison websites are your best friends when you come to this step. No single comparison sites covers every lender, and some may even have access to slightly different deals from the same lender, so for best results you should use two or three different comparison tools and then find the best deal from among them all.

Is Student Debt Really Debt?

Lots and lots of young people, as well as some not quite so young ones, are getting geared up to start university next month. Lots of others ended their university days just a couple of months ago. Both starting and finishing a degree can make for exciting times, but one of the biggest downsides of getting a degree is generally considered the amount of debt you leave with – generally something in the order of tens of thousands of pounds.

But is student debt really debt, in the sense that we generally understand? Obviously it is debt in the simple sense that you owe money, but there are some very important differences from other forms of debt. Understanding these, and not treating student loans in the same way as any other debt, can potentially save you a lot of money in the years following your graduation.

Repayments

One of the biggest differences between student loans and other forms of debt is the way that repayments work. Repayments are taken automatically from your wages when you work with the option to make additional payments voluntarily if you wish, which makes things nice and easy. More important, though, is the fact that repayments are only taken when you earn more than a certain amount (currently £17,335), meaning that if you have not yet found a job after graduation, start off earning less than this, or spend any time between jobs then there are no compulsory repayments whatsoever.

Write-off

The most important difference for many is the fact that student loans can be written off – something that is rare for any other form of borrowing. More to the point, if you have not repaid your loan after a certain time (for England and Wales, this is 30 years after you become eligible to repay if your course started any time after September 2012), then it will be written off. This is a huge difference, and where a lot of people go wrong by treating a student loan like any other kind of debt.

The Real Difference

But what do this differences mean in practice? Well the biggest factor is the debt write-off after 30 years (35 in Scotland assuming your course started in or after September 2007). Many people treat their student loans as they would any other debt. With most loans, it is ultimately worth paying back more than the minimum if you can because your debt will be shifted sooner and you will accrue less interest. Working on the same logic, it is common for people to make voluntary extra repayments towards their loan or to make payments voluntarily when they are not earning enough to be required to make compulsory payments.

However, as many as three quarters of students may never end up paying off their debts in full before they are written off. This means that the majority of students, by making extra repayments, would simply the amount they repay at the expense of the amount that gets written off. In other words, they are effectively paying extra money.

Of course, this comes down to personal circumstances. If you think you are likely to end up paying off the full amount before it is written off, then the logic of any other loan applies and paying sooner will reduce interest. If not, however, then you are best letting your future self take full advantage of the write-off.

Where to Find Money for Extra Debt Repayments

It’s a good idea if possible to repay more than the minimum on your debs every month. This will significantly reduce the amount of interest you end up paying before the debt has been fully paid off, and will help you to be debt-free sooner. However, it may be that you are only just able to make repayments at the moment or aren’t happy paying any more than the minimum in case the rest of your income is needed to cover some financial emergency. If this is the case but you still want to be debt-free as soon as possible, there are a few places you might be able to find some extra money to pay back your lender.

Little Cutbacks

It can be surprising how much you can save by making just small cutbacks in your lifestyle, and these little sacrifices can be used to find extra money for paying off a debt. Let’s imagine Elizabeth stops into a major chain coffee shop every morning on her way to work for a coffee, which costs £2.50. In the middle of the afternoon, she buys a chocolate bar from the vending machine for 80p as a pick-me-up. On the way home, she is usually thirsty so she buys a bottle of mineral water from the vending machine at the station for £1.

If Elizabeth gave up the coffee and the chocolate bar and started refilling her water bottle and taking it with her each day, she would save over £21 a week. Over the course of a year, she would rack up £1118 worth of savings which could be used to help pay off debts. Of course, you can’t be expected to give up every little pleasure but this shows how much small savings rack up. Her coffee alone (a fairly common habit) would save her £650 a year. If she really can’t give up her coffee and chocolate, she could still save most of this money by drinking instant coffee in the morning and buying multipack chocolate bars and taking one to work every day.

Your Possessions

You may be able to get a little extra for repaying debts from selling some possessions. Just as making little cutbacks doesn’t mean giving up every single luxury, so this doesn’t have to involve pawning your family heirlooms and selling your wedding dress. Rather, it means parting with things you no longer need but may still have hanging around.

Gadgets can be some of the best money-makers, but at the same time they depreciate quickly as technology moves on so it is best to get a move on with selling them. Old mobile phones made obsolete by a free upgrade, abandoned computers, and old games consoles can all be worth selling to get extra money to help shift your debts that little bit sooner. If you have any very old items that have been hanging around for many years, such as vintage computers or games consoles from several “generations” ago, their value may have gone full circle and you might find these items are now collectable.

 

Alternatives to Taking Out a Payday Loan

If you urgently need a financial boost to tide you over, payday loans can start to look tempting. However, with their extremely high interest rates they can quickly become a problem debt. Many people who take out payday loans as a short term measure find they have trouble paying them off. When this happens, interest rates of over 1000% APR (or equivalent in fees) can have plenty of time to bite.

If you are in a difficult situation but want to avoid payday loan debt, there are a number of lower-cost alternatives you might wish to consider.

A Word of Caution

You should think carefully about any sort of credit, and consider all your options before taking on debt. Make sure you know how you are going to pay back, and are confident you will be able to do so. However, as long as you properly consider your situation, these alternatives can prove far more manageable than payday loans.

Bank Overdrafts

If you speak to your bank, they may be able to arrange an overdraft on your account to help tide you over. Banks vary quite widely in how they manage overdrafts, but interest rates should certainly be much lower than on a payday loan. Some bank accounts come with attractive overdraft rates or even a small interest-free “buffer” as perks to attract customers.

Credit Cards

If you have a credit card, you may be able to obtain a temporary increase on your card’s limit if you talk to your credit provider. However, this is definitely an option for those who already know how they will be able to promptly pay back the debt. While credit cards are more affordable than payday loans, they can still be expensive and problematic if debt is allowed to linger. Nonetheless, if you know that you will be able to repay the full amount on time, this is usually decidedly preferable to payday lending.

Credit Unions

Credit Unions have been in the news for a while, with prominent figures who are critical of payday loans touting them as an alternative. These are community-based non-profits, giving members access to loans as well as to current and savings accounts. Loans from a credit union tend to be both more accessible than a bank and more affordable than a payday loan.

Budgeting Loans

This type of lending can be a huge help to those who find themselves in a very tight spot indeed. If you have been claiming working age benefits for 26 weeks or more and are lacking money for essentials, then you might be eligible for a budgeting loan. This is designed to cover the cost of things like rent, food, clothes and furniture. It is interest free, paid directly to your bank account, and will usually have a repayment period of two years.

Government Aids Debtors by Raising Forced Bankruptcy Threshold

Those who are in debt and are having trouble coping financially received some relief from the government this month. It has been announced that the level of debt required before a debtor could potentially be forced into bankruptcy is going to be raised significantly. Where previously this threshold was £750, it is now set to be raised all the way to £5,000.

The current £750 limit has been in place since 1986, and over the course of that time its value in real terms has been eroded significantly by nearly 30 years of inflation. According to the Bank of England’s inflation calculator, when it was first introduced it was equivalent to nearly £2,000 in 2013 (the latest year covered by the calculator), which means time has cut the true value of this limit to well under half of what it represented originally.

The president of insolvency trade body R3, Giles Hampton, said that “The rise in the creditor bankruptcy petition threshold is welcome, although £5,000 is far higher than expected.”

Hampton went on to call the previous limit “an entirely inappropriate level” and added that “the protection it offered debtors had been steadily eroded by inflation over the decades.”

According to business minister Jo Swinson, it will be replaced by the new, much higher limit in October of this year. The new £5,000 figure is not only a big increase on the previous figure, but also significantly higher in real terms than the current limit was even at the time of its introduction.

The increase of this threshold will be accompanied by another measure designed to help those in debt, as the maximum amount of debt that a debt relief order can cover will also be increased. Debt relief orders are often considered a more affordable alternative to going bankrupt, and were first introduced in 2009. Since that time, there have been well over 140,000 debt relief orders throughout the UK. They can currently cover debts of up to £15,000. From October, they can include up to £20,000 worth of debt.

Christians Against Poverty chief executive Matt Barlow welcomed this move, saying that over a third of the charity’s customers currently cannot afford bankruptcy fees but have too much debt to utilise debt relief orders. The raised threshold will open them up to more people who are currently struggling.

Barlow pointed out that “We had campaigned for the limit to rise to £30,000, which would have seen more than half of our clients being able to afford this debt solution.” Nonetheless, he recognised that “£20,000 is a good start.”

Three Ways Not to Borrow

Sometimes, you may need to borrow in order to make ends meet. Sometimes it can seem like you have no choice but to borrow new money to pay off older debts. However, there are several kinds of borrowing that you should not consider unless completely, unavoidably necessary. The types of borrowing that you should not consider except as an absolute last resort include:

Payday Loans

Payday loans are essentially designed as short-term products, and are therefore high interest. Unless you are absolutely, 100% confident that you can pay them back when you receive your next paycheque without putting yourself in financial difficulty, steer clear. Even if you are completely certain that you can do this, there is still a strong chance you can find some alternative solution that does not carry the same high interest rates. Those who can’t pay back the loans within the (very short) terms often get caught in a spiral of taking out fresh loans to cover the old ones. This means the high interest rates designed for short-term borrowing get applied over a much longer period, and the debt becomes rapidly much harder to repay.

Secured Lending

Secured loans can be tempting because they offer better interest rates on account of being less risky for lenders. When you borrow using a secured loan, you offer some valuable object as security, usually a house or car. If you are unable to repay the loan, the lender can take possession of that object to recoup their money. This is a very significant risk. If you have trouble repaying the loan you will not just accrue interest that you will eventually have to pay, but will risk losing your car or even your home. Mortgages and car finance options are technically secured loans, but for obvious reasons these are excluded from the rule of avoiding secured lending.

Logbook Loans

Logbook loans are a very specific kind of secured loan, using your car as security. However, they deserve special mention as they are a particularly risky kind of loan to take on as the lender essentially owns your car until the loan is repaid. If you cannot keep up repayments, the lender can promptly take possession of your car without the need for a court order. On top of that, where most forms of secured lending have low interest rates, logbook loans tend to offer very high interest rates. In essence, a logbook loan amplifies the risks of any other loan secured against a vehicle and does not even offer the attractive interest rates you would usually get in return. The only factor they do have in their favour is that they are accessible to people with poor credit ratings, and unfortunately this can make them look tempting to people who are experiencing financial difficulties.

Debt Consolidation: The Pros and Cons

Debt consolidation is frequently a good way to make multiple, difficult debts more manageable. If you are struggling to repay your debts or simply to keep track of multiple sources of borrowing, debt consolidation can be a way to put it all together into a single, manageable payment that you have room for in your monthly budget.

There are many advantages to debt consolidation, but there are also a few disadvantages. In order to understand whether you will benefit from taking out a consolidation loan, it is important to understand these factors fully.

The Pros of Debt Consolidation

The main factor that works in favour of debt consolidation loans is simply the fact that, for those who currently hold multiple debts, everything will now be in one place. You will not have to keep track of multiple credit products with differing interest rates and, if you have been having trouble repaying, you won’t need to worry about prioritisation. You will make a single payment to a single lender, and you will hold only one debt with a single interest rate.

If you have been having trouble handling multiple debts, a consolidation loan can also be a chance to effectively renegotiate things. You may be able to obtain a consolidation loan that not only combines all your debts but works out a new payment plan that will be more manageable in your current circumstances.

If you take out a consolidation loan, it is likely that your credit rating will also improve. Other loan accounts and credit cards will be closed down and replaced with just one. To lenders looking at your credit report, this is a sign that you are managing your debts more responsibly and so you look like a better, lower-risk borrower.

The Cons of Consolidation Loans

There are really few drawbacks to consolidation loans, provided you are in a situation that makes it an appropriate move in the first place. However, they are not completely without their potential disadvantages.

The main disadvantage is that they can result in paying higher interest on some of your loans. For example, credit card debt that is moved to a consolidation loan will be subject to the interest rate of that loan, while it might otherwise have been possible to transfer that debt to a new card that offers 0% on balance transfers.

Some consolidation loans also include penalties for paying back early. If you believe that you might be able to pay back your loan ahead of time, check whether there are any such penalties before taking a package out.

Should you Save While in Debt?

Many people who are in the process of paying off debts find themselves facing one particular dilemma. Should they aim to build up some savings for the future at the same time as paying off their debts, or should they focus all their efforts and available funds on clearing what they owe?

When Britons are being urged to save more, it is a difficult decision to make. There are two key factors that need to be considered in order to decide which approach is best.

What Will Leave you Better Off?

The question of which approach will leave you better off is surprisingly easy: you will be better off by focussing all your efforts on repaying your debts. Suppose you have £1,000 and are trying to decide whether to put it into savings or pay off £1,000 worth of debt. Putting it into an ISA will likely get you around 2.75% interest at best. This will earn you something in the region of £27.50 over the course of the year. If a personal loan has a fairly attractive APR of 8%, then leaving that £1000 worth of debt in place will cost you £80 in interest over the course of the year, leaving you more than £50 worse off. In other words, thanks to the fact that loans and credit products almost always have much higher interest rates than savings accounts, you will be better off repaying debts before you think about putting money into savings. Most financial advisers will recommend this approach because it will ultimately leave you with significantly more money.

Unexpected Expenses

On paper this seems simple enough. You stand to gain a lot more from paying off debts than building up savings. However, the danger of some unexpected expense complicates things a great deal. If you put every penny you have into paying off debts, then you might end up in trouble if your car breaks down or your home needs some form of repair. The last thing you want to do when struggling to pay off debt is put yourself in a position where you need to borrow again. If you do not currently have any savings at all but you are earning enough to have money left over after meeting your minimum repayments, then you might want to build up a small amount of savings. This will serve as a buffer to protect you if the unexpected happens. Once you have a little bit “for a rainy day” you can then shift your focus more wholeheartedly onto clearing what you owe.

Can a Debt be Written Off?

In exceptional circumstances, it might be possible for a debt to be partially or fully written off. It is even possible that a creditor might cease all action against you. While this situation is rare, it can seem like a genuine godsend to those who find they are eligible.

Dealing With Debt

It is important to note that having a debt written off is rarely if ever a first option to consider if you are having trouble with debts. As it will only rarely be granted, you should first take every reasonable effort to manage your debts and your financial situation. Contact your creditors and see if they are willing to come to a more manageable repayment arrangement. Seek independent advice and come up with a debt management plan.

Lump Sums

Possibly, the easiest way and most common to get part of a debt that you are struggling to repay written off is to offer a lump sum. Unfortunately, most people who are struggling with debt will be unable to do this. However, for those that are, offering creditors a full and final settlement can be an attractive option.

If you are able to offer a lump sum which represents a reasonable portion of your debt, your creditors may be willing to accept it and write off the rest. It is, in many ways, better for them to accept less money but to get it immediately instead of slowly over a number of years, especially if your circumstances may lead to complications when it comes to repaying the full amount. If your creditors agree, make sure you obtain written evidence that the lump sum is all you will be required to repay.

Simple Write-offs

In very rare circumstances, a company may be willing to write off your debt completely. This will usually only happen if you have very little hope of repaying the debt. Not only will you have to be on a low income for a creditor to agree to this, but you will also have to be in a situation which means your finances are unlikely to improve. Most often, debts are written off for the elderly or people suffering from serious illnesses.

Individual Voluntary Arrangements

Many companies advertise a “government scheme” to help write off part of your debts. This usually refers to Individual Voluntary Arrangements (IVAs). While IVAs are genuine, they are not as simple or pleasant as the adverts would suggest. For several years, every bit of spare income you have will likely be paid towards your debts. You may also be required to sell valuable possessions. However, if you are in a very difficult debt situation this can still have some definite advantages. After the amount you agree when the IVA is taken out has been paid, the remainder of your debt will be written off and you will be debt-free potentially much sooner than you would have been otherwise.