Even those who know their stuff can make poor financial decisions. Katy Ward looks at better ways that she could have dealt with her debts.
This is an embarrassing confession – for anyone who aspires to be a sensible person in their 30s and especially for someone who makes her living as a financial journalist.
Last year, I got myself into a money mess, took out a payday loan with an extortionate interest rate and found myself repaying almost double the amount originally needed to borrow.
How could I be so stupid? It’s a familiar story and one most of us can probably all relate to.
After starting a new job, my first salary payment didn’t come through as soon as I expected, which left me without any money coming in for almost two months.
This cash flow crisis coincided with a particularly stressful time in my personal life. I won’t bore you with the details, but let’s just say I didn’t want to impose my financial stresses on my family at an already fraught time.
My finances were far from dire. I needed £600 to cover my expenses for the month, which I could easily repay when my next salary came through.
With the stress of my mother being unwell, I wasn’t thinking with my financial journalism head and sought out the quickest solution to dig myself out of a money hole.
I applied to one of the biggest players in the short-term loan market and was accepted immediately. The entire process took less than two minutes and in the biggest mistake of my financial life; I had foolishly agreed to repay £1,184 on a loan of just £600.
I hardly glanced at the loan agreement, which meant I failed to appreciate just how terrible the deal actually was and how many more attractive options were available to me.
So, what are some of the cheaper options to borrow if you’re short on cash?
Consider an interest-free credit card
If you have a good or excellent credit history, taking out a credit card with a lengthy interest-free period on new spending is often one of the cheapest ways to borrow.
At present, the most competitive deal on the market is Sainsbury’s Nectar Purchase Card, which carries a 0% period of 31 months.
Alternatively, you could opt for a 0% balance transfer card if you’re currently paying expensive interest on credit card debts. These allow you to shift your existing balances onto a new card that doesn’t charge any interest during an introductory period.
The current market-leading deal is with MBNA, which offers an interest-free period of 36 months – although you’ll need to pay a 2.49% fee on any debts you transfer. So if you transfer £1,000, you’ll pay an extra £24.90.
Be aware that you may be hit with hefty interest payments if you don’t clear your debt before the 0% period ends. Plus, your credit card company could revoke the interest-free offer if you fail to make your payments on time.
If I’d managed one of these cards sensibly, I could have paid far less than the £600 in interest that I was eventually stuck with.
Investigate interest-free overdrafts
By switching to a current account that offers a 0% interest-free period on overdraft debts, you could potentially avoid expensive charges on your day-to-day spending.
First Direct offers a £250 interest-free overdraft buffer if you occasionally go into the red. To qualify, you’ll need to pay at least £1,000 into the account every month.
Alternatively, Nationwide’s FlexDirect has an interest-free overdraft for 12 months, with your limit depending on your credit score. As soon as the 0% period ends, you’ll pay a daily fee of 50p on your overdraft borrowing so it’s wise to clear your debt within a year, if possible.
Be honest with your creditors
When I realised that I was going to struggle for a month, I should have immediately contacted my bank, landlord, credit card and mobile phone companies to check whether I could move my payment dates as a one-off.
With years of prompt payments on my credit file, they would most likely have agreed and in fact, the British Bankers’ Association’s code of practice requires that lenders treat customers who are experiencing financial difficulties sympathetically.
Think carefully before locking away your savings
One of the biggest frustrations I had during this time was that I actually did have savings to fall back on, but I had chosen to stash these away in a five-year fixed-rate account that offered a more competitive interest rate than I could have received elsewhere.
Although fixed-rate accounts can be fantastic financial products if you want to save in the longer term, they often impose significant penalties if you need to withdraw your money early.
What’s more, it can take weeks to get access to your funds, which isn’t ideal when you’re suddenly struck by cash-flow problems.
In retrospect, it would have made far more sense to have a small emergency fund in an account I could access straight away.
Where to get help
If you are experiencing serious money difficulties, the following organisations can provide support and advice to help you get your finances back on track:
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