Life after debt

How to avoid hidden borrowing costs

Posted 09 February 2015

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If you ever miss a payment, you may be met with unexpected borrowing costs. To help you avoid these additional charges, we’ve got all you need to know.

Paying off debts can be a slog, and the longer you leave it to make repayments, the more you can be hit with further costs - such as extra interest and charges. To help make you aware of these costs, and hopefully help you avoid them in future, we’ve got all you need to know.

Going over credit limit

If you’re borrowing on a credit card but go over your agreed credit limit, it is likely that you will have to pay an additional charge, which is normally around £12. To avoid this happening, make sure that you know how much money you have left on your credit card at the end of every month. This should be relatively easy to do nowadays, as you should be able to access this information either online or on your mobile phone through an app.

Late payment charges

If you’re struggling to keep up with your repayments on a credit card or loan, and only manage to make a payment after it is due or not at all, you will usually be charged a late payment fee, which could be anything up to £12. This can affect your credit score, which could make it harder to borrow again in the future, so it’s a cost that’s good to be aware of.

Something else to be mindful of is that if you miss a payment on a credit card that has a promotional offer, e.g. 0% interest for 6 months, your card provider may withdraw the promotional offer and the interest rate on your card could jump up. To avoid this situation, it’s worth setting up a direct debit with your credit card company to ensure that you never miss a payment.

If you can’t afford to make the minimum repayment on your credit card or loan, then it’s really important to speak to your lender as soon as possible. Depending on their terms and conditions, your lender could work with you to arrange an alternative payment plan.

Unauthorised overdraft fees

When you exceed your authorised overdraft limit, or go into the red if your bank has not agreed a limit for you, then you could be met with unauthorised overdraft fees. These vary based on how long you are in your unauthorised overdraft for and can prove quite costly if you’re in it for a while. For example the monthly fee can be anything from £5 to £35 per item and you can be charged a daily fee on top, which is usually £1 - £5 per day (up to a set limit per month).

When in this situation, talk to your lender and see if they will authorise your overdraft. If they refuse to do this, it could be worth cancelling any direct debits that you have. This is because, when you are in your unauthorised overdraft, you may be charged for every cash withdrawal, direct debt or standing order, as well as any cheque or card payment that go out of your account.

Returned payments

If you are in an unauthorised overdraft your bank may refuse to honour any standing orders or direct debits that are due to leave your account … these are called returned payments. Many providers charge a fee for each item they return. This charges could be anything between £5 and £12, so it’s important that if you don’t have enough money to cover these payments, you cancel your direct debits and standing order to avoid these charges. Bear in mind however, that you will have to make these payments another way.

Seeking help

It’s not usually until you find yourself struggling to make repayments that you become aware of hidden borrowing costs, which is why it can be hard to deal with these charges if you’re already struggling financially.

If you’re struggling with multiple loans, credit cards over overdrafts that are accumulating additional borrowing costs, then it’s important that you deal with the root of the problem … the debts themselves. If you would like to talk to someone about your situation, one of our expert advisers will be able to listen to your situation and talk you through the different debt solutions that are available (fees are chargeable on some solutions).

The advice that you receive from an advisor could help you to start to solve your problem debts as well as the hidden borrowing charges that often come along with them.

by Emily Bancroft

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