A recent survey by StepChange found that many consumers are relying too heavily on credit and are failing to put aside sufficient savings, but this could have long-term consequences – and our latest figures show just how easy it could be to get trapped in a cycle of debt.
Our analysis shows that those who don't plan their repayments, or in the worst case scenario, lose their main source of income, could find themselves living in fear of their debts as their credit spirals out of control.
StepChange's research found that three-quarters of consumers who fall into debt either rely on credit cards and overdrafts, or borrow from family members, to keep on top of their spending, but these are only short-term coping mechanisms – and reliance on credit can quickly add up to an unmanageable sum of money.
An overdraft, for example, can be particularly debt-inducing, even if you arrange it in advance. Let's say you had an authorised overdraft that came with a £1 daily usage fee. It may not sound like much, but if you borrowed £100 by dipping into your overdraft for 15 days, it would add up to a monthly charge of £15, or £180 a year. This is more expensive than taking out cash on a credit card charging 25.89% pa, which would cost only £2 a month or £24 a year in interest.
This illustrates that borrowers need not rely on their overdrafts to keep up with payments – other options, such as a credit cards with an interest-free deal or a competitive personal loan, could be far more cost-effective. The table below highlights a few of the most common borrowing methods and their rates/charges, together with how much they've changed in recent years.
"Building up a safety net is key to ensuring that credit isn't used as a short-term funding solution," said Rachel Springall, finance expert at Moneyfacts. "For those without savings, credit can be a useful stopgap, but this can easily turn into unmanageable debt, inciting fear among millions of borrowers.
"Consumers who rely on credit to manage their outgoings each month could be making their lives even harder by turning to some of the most expensive sources of credit, such as overdrafts, high interest credit cards or payday loans. However, applying for a competitive unsecured personal loan or searching for an interest-free credit card can be far more cost-effective and less financially burdensome. Borrowers should therefore think carefully about their borrowing options and search the market for the best deals.
"To avoid falling into a spiral of debt, borrowers should take the time to run a credit report [such as through Experian Credit Expert] as part of a regular financial health check, and should review their debts on a regular basis to ensure things aren't becoming unmanageable. This way, they may be able to avoid trouble before it's too late."
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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