New rules on credit card debt: what do they mean for me?
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If you’re young and struggling with debts you can’t afford to repay it does not have to be the end of the road for your finances, there is help available.
Using credit; the right way to do it
Talking about debt can make the idea of applying for credit seem really scary, but it doesn’t have to be. Read our tips on how to use credit the right way to help you in the future:
· Overdraft: If you’ve got one, you should treat it as a safety net and not an extension of your available funds. And try to make sure you don’t spend more than your authorised overdraft amount so that you don’t incur extra fees and charges from going into an unauthorised overdraft.
· Store cards: Store cards are usually offered with attractive discounts that let you save a fair bit of money on your purchase that day. However, many come with fairly high rates of interest – up to 25% in a lot of cases – which may make clearing the outstanding balance very expensive if you can’t clear it in one go. So, if you want to enjoy all of the advantages of store cards, with none of the downsides, be sure to repay what you’ve spent as soon as possible. And certainly within the interest-free period, this way you can avoid the extra cost.
· Credit cards: There are all sorts of credit cards on the market; some with low spending limits, some with high ones, and others that come with added benefits, like loyalty points or cashback. Plus, they all have the benefit of added protection through Section 75 of the Consumer Credit Act, (which entitles you to a refund from your lender if the retailer won’t help you) if the item you bought is faulty, broken or never arrives.
As with store cards, the best way to credit cards is by paying back what you’ve spent within the interest-free period. If you can’t afford to do this, set up a standing order to pay off as much as you can every month so that you clear the balance in the shortest amount of time possible. Remember, if you only make the minimum payment required by your lender each month it can take you a very long time to clear the debt, and you may pay a large amount of interest.
· Payday loans: Payday loans can seem very tempting – if you are running low of cash they can seem like a quick and easy way of bridging the gap until your next income. However, they are a very expensive way to borrow money. The interest rate on payday loans is capped at 0.8% per day – which is equivalent to an APR of over 1,500%. There are extra charges on top of this if you don’t repay the loan on time. Using payday loans may also make it harder to access other forms of credit in future – including mortgages.
If you need to buy something, the best way to do it is usually with your own money. For larger items this may mean that you need to save up. Experts recommend that we all should have at least the equivalent of three months’ worth of income tucked away in a savings account. Building a saving pot will help you fund larger purchases, and make you more resilient – for example if you lost your job.
There’s nothing inherently wrong with using credit of course. It is best not to use it to fund your lifestyle – so to pay for holidays, designer clothes, nights out or flashy gadgets. But it can be a good way of spreading the cost of bigger ticket essentials – such as a car, new washing machine or essential home improvements, like a new boiler. Before you borrow any money you should think carefully about whether you can really afford to make the repayments, not just now but for the life of the loan. And could you still afford them if your circumstances change?
Lenders have a responsibility to ensure that they lend responsibly – so they will make their own checks to satisfy themselves that you can afford any borrowing. But as consumers we shouldn’t rely on them – it is down to each of us to ensure that we borrow responsibly too.
Credit and your future
Credit is not something you should be scared of, even if you have encountered problems with it early on. Using credit responsibly helps you build up a good credit score, which makes it easier to access other forms of credit – like a mortgage, for instance – and better deals in the future. In fact, having and managing credit well can be a great thing, as it builds a strong credit score, which makes it easier for you to access credit in the future.
If you’ve had problems with debt, try not to worry. It’s true that this will probably affect your credit score and may make borrowing difficult for a while, but as long as you ultimately pay off what you owe this doesn’t last forever – usually six years, depending on what situation you’re in and what kind of debt solution you choose. Once this time has passed, there’s every chance you can start to rebuild your credit history again and have a much more enjoyable experience of borrowing.
Finally, if you’re currently worried about a debt, the key is to seek help and take action as soon as possible. The sooner you start to fix the problem, the sooner you can start to take control of your finances and look forward to the future.
by Shelley BowersBack to blog home