BORROW THE RIGHT WAY
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RACHEL'S DEBT STORY
Borrowing the right way
Borrowing is part of life and, at some point, most of us will take some debt of one sort or another. However, the key is to manage your borrowing – to ensure you can afford the repayments, that you understand what you have signed up to and that you have used the right product that matches your need.
Credit and store cards have become an easy and accessible way to pay for holidays, shopping sprees or entertainment. A generous credit limit, particularly if you have more than one card, can sometimes mean the total amount you can borrow can exceed your monthly income. Credit cards are a good method of payment, offering more protection to the consumer than paying by cash (it is worth checking what protection a credit card can provide – Citizens Advice has information here), but they are an expensive way of borrowing if you do not clear the balance on the card every month. The average interest rate charged to a credit card is 18%. Moneysavingexpert.com calculate that using just the minimum repayment to pay off £3,000 in credit card debt (with no further spending on the card) would take a staggering 27 years, with an interest cost of almost £4,000.
Importantly you don’t want to end up repaying debt well past the useful life of the thing that you borrowed the money to buy. A 25 year mortgage for a house makes sense; 27 years to be repaying a shopping spree makes less sense.
If you want to pay for an item using credit, it is important to consider not just how much you want to borrow but how much you can afford to repay each month and for how long. The interest rate and any extra charges or penalties – either for late payments or for early repayment need to be taken into account. You can compare the cost of different types of borrowing on the Money Advice Service website.
Sometimes, it can be difficult to access standard credit products, either because you have a bad credit score or, perhaps, no credit score. There are companies who provide funding to people in straightened circumstance, but this can be very expensive. Be wary of payday loans that require to use your next pay cheque or student loan payment to repay the loan. They are generally for short term needs and for short term amounts, but the interest rate can be very high and the cost punitive. There may be other options available, and it is worth checking these out on reliable websites like Money Advice Service or Money Saving Expert.
Failing to plan and structure borrowing can run the risk of your borrowing becoming unmanageable. Sometimes, even when you do plan, events happen that are beyond your control and cause financial struggles. If you are unlucky enough to find yourself struggling keep up with repayments or falling behind with bills, then seek advice, whatever the amount of the debt is. Debt can be scary to deal with and admitting you are struggling can be difficult, but there are people with the skills and knowledge who can help you. Talk to them.
You can read more about borrowing the 'right way' by following the links below.