Managing your finances during the credit crunch
This time last year we were experiencing and enjoying the benefits of 'easy credit'. For some people this was a good thing and for others very bad. It certainly led many consumers into a false sense of security and made living a luxury lifestyle on credit all the more appealing.
Today it is a very different story. The sheer choice and number of loans, credit cards and 100% mortgages has been dwindling away over the past few months, leaving many people with the choice of a select few financial products.
Getting a loan is much tougher now. Whether it is an unsecured one or a homeowner secured loan you will be hard pushed to find one with a rate that we had come to expect. Those people with good credit looking for loans are likely to find it easier to be approved for a loan whilst if you suffer from a poor credit rating, the number of lenders offering bad credit loans is very limited at present.
It is well worth using this time to tighten up your purses and make sure you work on maintaining or improving your credit rating. The following tips are designed to help you save money, avoid getting deeper into debt and put you in a better position financially even if your aim is just to get a loan or mortgage, the better shape your finances are in, the more choice will be available to you.
1. Debt Consolidation
Reducing your current debts is crucial in times of financial turbulence. Make sure you keep up with any loan, credit or mortgage repayments, any late or missed payments can generate additional charges and also damage your credit rating making it harder for you to get credit.
- A loan for debt consolidation could be the way to go. Combining all your outstanding debts can make your monthly repayments more manageable and whilst you may end up paying back the loan over a longer period and paying more interest overall, it can still prove to be beneficial if you are struggling with your current repayments.
2. Limit your outgoings
Going through your finances with a fine tooth comb can often reveal glaring overspending. Maybe you have a magazine subscription that you don't really need anymore, or your gym membership that is used less and less each month. Even buying a coffee every morning at £2 a time can add up to a huge amount on a monthly basis.
- Make a note of things you can live without - it doesn't have to be a permanent measure - and cancel any unwanted or unused direct debits or change your spending habits.
- Setting up direct debits to pay household bills like water, gas and electricity can often be discounted so set these up and save yourself some money.
3. Savings
Savings are very important and if possible you should continue paying into a high interest savings account. However by the same token, if you have an outstanding debt it is worth paying this off before continuing with your savings scheme. The interest accrued on your savings will be much less than the interest you pay on loan/credit repayments and negates any savings you make.
- Always pay off loans and credit cards before saving money.
4. Control Your Spending on Cards
Stop accruing debt on your credit and store cards. Store cards are particularly notorious for having high rates of interest. Avoid buying any large or expensive items such as cars, furniture or electrical equipment.
- Reduce the number of times you use your credit card and make sure it is for emergencies only and not your daily living expenses.
- Always pay in time each month otherwise you not only risk an additional fine, but you will affect your credit rating too. Whilst this is not a permanent thing, it certainly becomes a bit of a hindrance when applying for credit. Call your credit card company and asking for your APR to be reduced or consider transferring your balance to a 0% interest credit card.
5. Getting a Loan
If you find you do need a loan for consolidating your debts, a home improvements loan or for any other purpose make sure you don't borrow more than what you need to. Do your sums before applying to make sure you can afford the repayments each month. It's important to opt for a loan with the lowest TAR amount. This is the Total Amount Repayable over the lifetime of the loan and is a clear cut way of seeing exactly how much the loan will cost you.
- Secured Loans - Homeowners can use the equity in their homes to borrow money. You must have enough equity to cover the loan amount. So if you have a house worth £200,000 and a mortgage balance of £150,000 in theory you could borrow up to £50,000. However this does vary on circumstances such as the lenders criteria and the property market, which at present is seeing house values fall slightly.
- Unsecured loans - Anyone can apply for an unsecured loan but because of the higher risk involved to the lender (as there is no collateral acting as a safety net) the interest you may pay will be higher than that of an unsecured loan. Even if you own your home, you can still opt to apply for an unsecured loan - especially if you don't want the added risk of repossession if you get into mortgage arrears.
We are in a culture of 'buy now and pay later' and this can be very damaging if it isn't controlled. Spending beyond your means will cause many problems now and in the future. Times have changed and it's important to keep on top of your finances and be responsible with your spending and borrowing.