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.

Should you Ever Pay off Old Loans With New Ones?

Taking on new debts to pay off your old ones sounds like a problematic debt spiral, and in some circumstances it can be exactly that. In other situations, though, the idea can start to look quite attractive and like it could potentially help make your situation more manageable. Is it ever a good idea to pay off old debts with new?

The Advantages

In principle, there will be an advantage to paying off an old debt with a new one if you can get a better deal on your new loan than you are getting from your current lender. Paying off one loan with a newer one that has a lower rate of interest is, in many ways, the same as switching provider for a utility or insurance product. You simply move from one company to another, because with the new one you will pay less monthly and/or over the full term of the loan. Depending on your circumstances or needs, a better deal could mean a lower interest rate, saving money both monthly and in total, or it could mean a longer term which means you pay back more overall but have significantly lower and more manageable repayments.

This kind of situation might arise because you have held a loan for some time and better deals have come on the market. Alternatively, it may be that you didn’t get the best deal when you took out the loan, for example choosing an ultra-high-interest payday loan that you are now struggling with when you could have borrowed the same amount elsewhere at a much better rate. If you are genuinely struggling on your current deal and the new deal would be enough of an improvement to solve your problems, it is best to switch as soon as possible or your credit rating may fall and you may no longer have access to the better deal. If you are struggling with multiple debts, on the other hand, then a specialist debt consolidation service may be a better way to move what you owe and make things more manageable.

The Problems

In principle, any situation where you could get a better deal on the new loan is one where it is worth taking out a new debt to pay off an old one. In practice, however, things are not usually that simple. With the exception of credit cards, where balances can commonly and easily be transferred for fairly low fees, switching loan providers is not as simple as changing utility or insurance providers. For one thing, you may or may not be eligible to take out the second loan. There are online tools that can help you work out whether you are.

There is another major factor that affects whether you will gain from the switch. In order to switch, you will need to take out a new loan for the full settlement value of the old one, and then pay the latter off at once with the funds you have borrowed. This is where potential problems come in, as your old loan may well carry early repayment fees. It is important you look into these fees before making any switch. There may be multiple separate charges, so make sure you are aware of them all. It is only worth switching if you stand to gain more from changing deals than you will lose in early repayment charges.

Rebuild a Credit Score Damaged by Debt

If you’ve had trouble with difficult debts and managed to pay them off, you probably breathed a great big sigh of relief the moment they were clear. But while you have every right to sit back and take a welcome breather from your worries, you might soon start to think about the next challenge: rebuilding your credit score. This doesn’t have to be a rush, but it will be important in the future if you ever want to take out credit again, whether it’s a mortgage, a simple credit card, or even a finance deal on a purchase.

Fortunately, rebuilding your credit score doesn’t have to be anywhere near as stressful and difficult as dealing with problem debts. There are a few steps you can take to help put your record back together.

Take a Look

It’s understandable if you’re reluctant to look at your credit report. You know it’s going to be bad, and the debts that got you into this situation are probably not happy memories, so why go out of your way to find out just how bad it is? The truth is, however, that it’s best to know exactly where you stand and how far you have to go. Obtain a copy of your report, and keep an eye on it throughout the process to watch how it improves.

Get a Credit Card

Your credit report is basically your record as a borrower, so there is one very useful way to improve it; borrow and pay back. To build up a record as a good borrower, you need to demonstrate that you can manage and repay debts Clearly you don’t want to take out a full-on loan or anything like that, so credit cards are the way to go. Get whatever deal you can get, and start to use it. Cards for poor credit tend to have very high rates of interest, but that doesn’t have to matter. Just make sure you pay it back in full and on time each month to avoid the issue of interest. Use it to buy things you could and would have bought anyway with cash (lots of little purchases will be fine), so that you will always have the money available to pay it off right away. This will build up a record of good, responsible borrowing and boost your report.

Know What Goes on the Report

As well as looking at your credit report, it is best to make sure you know what goes onto it. If you sometimes forget to pay your bills until you receive an overdue notice, this might seem harmless enough but it goes onto your credit report and brings down your score. Other things can be used as a surprisingly simple way to improve your score, such as making sure you are registered to vote. Familiarising yourself with the kind of things that can affect your score will help you make sure you are doing all you can to bring it up.

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.

Borrowers Warned to Prepare for Mortgage Rate Rise

Homeowners with mortgages have been warned by lenders that they should start preparing for a rise in rates. The news follows soon after it was revealed that the number of repossessions fell this past Spring.

However, the concerns that a rise in interest rates might bring up are somewhat mitigated by the quarterly inflation forecast issued by Bank of England governor Mark Carney. This forecast was announced on Wednesday, and contained a statement from Carney saying that future interest rate rises would take place only gradually. The increases would also take into account an assessment of the ability of homeowners to manage.

The Council of Mortgage Lenders (CML) welcomed the news that rate rises would take place “in a series of ‘baby steps'” through which the overall increase would be implemented gradually. They particularly stressed the fact that these steps would reportedly be “matched to a careful assessment of the ability of households to deal with higher borrowing costs” in order to prevent rate rises from putting too much sudden strain on the finances of borrowers.

Nonetheless, the CML still stressed the importance of being prepared for the time when rates do finally rise. According to Paul Smee, the CML’s director general, “rates will rise at some stage, of course, and borrowers should be planning for that now.” Smee added that “any borrower anticipating payment problems should talk to their lender as soon as possible.”

At present, the situation seems to stand in a very positive place. The second quarter of 2014 saw 5,400 properties repossessed because their owners had fallen behind too far with their mortgages. This figure is 1,000 below the number of repossessions that took place in the first quarter of the year. It also represents 2,200 fewer homes being repossessed than in the same period in 2013. Perhaps most encouragingly of all, it is the lowest number of repossessions to take place in a single quarter since 2008 when records began. This fall in the number of repossessions was in line with forecasts that the CML had previously made.

The CML also reported that fewer homeowners are now falling into arrears. At the end of June, 131,400 of mortgage holders were in arrears by at least 2.5% of the total value of the mortage. This is the lowest figure seen since early 2008.

Unfortunately, those who rent their properties do not seem to be in such a strong position. Landlord Possession Claims, the first stage in the tenant eviction process, have been steadily increasing since 2010 according to the Ministry of Justice.

 

 

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.

Reasons for a Bad Credit Rating

A bad credit rating can make it harder to take out loans and credit cards. They may mean you cannot take out new sources of credit, or end up with high rates on credit cards and mortgages.

If you have found yourself turned down for credit or been offered higher than expected rates, this is a sign you may have a bad credit rating. There are several things that might cause it, and if any of them apply to you it may be worth taking action to improve your score.

Missed Payments

Missing loan repayments or being late to make them is a key factor in getting a bad credit rating. This doesn’t just apply to loans and credit cards either. Missed or late payments for utility bills can also feature on your credit rating. If you have failed to pay back credit according to the agreement, this will make lenders wary of trusting you with money in the future and hit your credit score.

Even if you are meeting repayments, this does not guarantee your credit score will be left untouched. For example, if you are only managing to make the minimum levels of repayment on a credit card, it might have an effect on your credit score. This is because it could lead lenders to suspect you may be having trouble paying debts back.

Lack of Credit History

Some people think that if they have rarely or never taken out any form of credit in the past, this will give them a good credit score because they have no problems against their name. In fact, this is often not true. If you have no credit history or a very short one, you are an unknown quantity in the eyes of lenders. They cannot judge how reliable you are at making repayments because they have no past information to go on.

Unfortunately, good behaviour doesn’t always mean a good credit rating even if you have taken out debts in the past. If you have a history of taking out small debts such as credit cards and then paying them off on time, this might mean lenders still feel some uncertainty about how you would handle bigger debts. Though it may seem unfair, this may also lead them to see you as an unprofitable customer, as you do not accrue interest on debts.

Bankruptcy and Court Judgements

Another important factor that can hit your credit rating is the kind of financial issue that leaves an official record. If you have ever been bankrupt, this will have a very definite impact on your credit score. The same applies if you have ever entered into an Individual Voluntary Agreement. If a County Court Judgement has been made against you stating that you owe money, once again this will leave a black mark on your credit rating.

Where to Find Personalised Debt Advice

If you’re struggling with debt, there are many things you can do to help make the problem more manageable. Information on many of these things can be found online, and this sort of help might be all you need. However, sometimes you might need to talk to somebody directly and get personal advice about your unique situation. In this case, there are a number of places you can go to get free, impartial, and personalised advice on dealing with debt.

Citizens Advice Bureau

Your local Citizens’ Advice Bureau (CAB), an independent charity, can advise you on dealing with debt as well as a range of other problems such as legal issues. The first CABs opened at the start of the Second World War, and today they are one of the most widespread, readily-available and useful sources of free and impartial advice. You can go to your local Advice Bureau in person and without an appointment, where an advisor will be happy to talk you through your options and rights. Even smaller towns will often have a CAB, either in a full-time dedicated premises or part-time in a local venue such as a town or church hall.

StepChange

Like the Citizens’ Advice Bureau, StepChange is an independent charity devoted to bringing free and impartial advice to those who need it. Unlike the Citizen’s Advice Bureau, they do not have a nationwide network of offices allowing you to seek help in person. On the other hand, they are also more specialised, focussing entirely on debt advice rather than on a range of problems. You can find a selection of highly useful information on their website as well as seeking personalised advice on your specific situation by phone. Their helpline is free to call, including when you call from a mobile. It is open Monday-Friday from 8am-8pm, and 8am-4pm on Saturdays.

National Debtline

National Debtline offers you free advice over the phone, as well as a range of other free services. Their helpline is completely free, and is open from 9am-9pm on weekdays as well as 9.30am-1pm on Saturdays. This allows you to talk directly to an advisor who will give you free advice. There is also a range of information on their website as well as a comprehensive self-help pack. If your circumstances qualify, they can also help you set up a debt management plan or a debt relief order. These services are also free of charge.

How the banks haven’t been so ethical – PPI

Payment protection insurance is a type of insurance policy that repays loans or credit card payments when customers come across financial difficulty caused by sudden sickness, accidents or injury. Like any financial product, PPI had certain terms and conditions that had to be met to enable a claim on the policy, and had certain exclusions that applied.  These however, were often not relayed to customers, and neither were the eligibility criteria.  Those who were self-employed or retired, for example, were not eligible for a PPI policy so they shouldn’t have been sold one. But they were, and millions of customers were duped into purchasing this insurance and paying additional premiums on top of their borrowing repayments.

When the number of complaints about PPI reached a high volume, an investigation found that PPI was mis-sold to customers by banks and other lenders in about 90% of cases.  The law took the side of the consumer and the unethical practices of the banks were put in the spotlight.  The High Court ruled the banks were to refund all customers mis-sold the insurance policy, with interest added to the compensation amount too.

The Lloyds Banking Group takes the crown for the largest amount of miss-selling of PPI policies. By the end of 2012 they had spent approximately £4.3bn in compensating their PPI claims victims. The Lloyds Group had also been fined however, at the cost of millions, for delaying compensation payments to customers.  Like many of the banks, they were very quick to take people’s money and to demand repayments and induce fees and fines where it suits them, however when it comes to paying up themselves they are far from prompt.  HSBC and Barclays have also allocated millions to repayments for mis-sold PPI.

If you have been affected by mis-sold PPI, seek to claim your money back now.  Get your claim in as quickly as possible as the banks are doing their best to try to force a deadline for PPI compensation payments to customers. This is worrying as many customers (millions who still don’t even know they have PPI) are yet to make a claim.  Check your loan or card agreement now. To make your claim, see here on how to proceed.

The average payout amount for successful PPI claim compensation is £3,000 – an amount that could make all the difference to so many individuals and families out there today.