We all know that we should be saving and that we should be doing so regularly. Not just for that proverbial rainy day! Savings can help us to get that occasional treat, purchase high ticket items like a car, or even provide a stepping stone for a house purchase. Perhaps more importantly, having savings gives us a financial safety net, a cushion should something go wrong.
So yes, we all know that we should be saving. But the reality is, that 12.8 million households in the UK have little or no savings at all. So what happens when you don't have enough savings to rely on? Let's see some options!
Life can be challenging at times. Even when we think we're financially on track, all of a sudden we can be knocked off course. An unexpected medical bill, reduced working hours due to the pandemic can impact even our most well-laid plans. The key here is to get back on course and to do so as quickly as possible. Savings are nothing magical, nor are they unobtainable; they are the result of forethought and careful planning. The good news is that it is never too late to start this planning, although the sooner, the better.
There are times, however, when that 'bump' is more than slight. This time last year, who could have predicted Covid-19? Who could have foreseen the number of job losses that are looming? Even those with the best-laid plans may be experiencing hard times right now.
So, what if despite careful planning and budgeting, the current climate has seen your savings rapidly depleted? What options are available to tide you over until you can correct your course?
Around 6 million people are falling behind on household bills during the pandemic. Alternative financial safety nets are more important than ever. One that can cover us even when our savings have been exhausted. If you are soon scraping the bottom of your savings pot, it may be time to explore what credit options are open to you. With overdrafts, loans, and credit cards potentially available, which could be right solution for you?
Before considering these options, it is important to ensure clarity here. Credit used wisely can be of benefit to you. It can help with emergencies and assist when maybe you're just a little short of meeting an upcoming bill. Being responsible with your use of credit can even increase your credit score and worthiness. Having these options set up and accessible, before there is any need to use them, is all part of the planning and ensuring that your financial cushion is in place.
Conversely, being irresponsible with credit can cause you long term damage and perhaps make a situation even worse. Credit is by no means a solution to cover your day to day expenses in the long run. It can lead you down a debt spiral which can be hard to get out of.
When used responsibly, credit may be a way of providing you with an additional financial safety net. With that out of the way with, let's consider the options open to you and when these can provide a solution.
As part of your bank or building society account, you may have access to an overdraft facility. A bank can grant you an overdraft at the time that you open your account or you can apply for it. Eligibility requirements may differ between different banks and building societies. In general, banks will ask your employment status and income details, as well as carrying out a credit check.
The amount you can borrow via this means is dependent upon those factors above. You can get access to £100's or, potentially, £1000's. If you manage the facility responsibly, you may well see this amount increase over time.
Of course, this isn't free money; you will need to pay interest on whatever money you borrow. Usually the longer your account is in overdraft, the more interest you end up paying. Ideally then, you should see an overdraft facility as a short-term method of borrowing. This could be perfect for when you have a bill payment due just before payday, but you know in a short space of time you'll have the funds to cover the cost.
The plus side of an overdraft is that it is easily accessible, right on your bank account and you can even withdraw it as cash. It can be an additional layer to your financial cushion, helping to tide you over unexpected events. However, in the ease also lies a bit of danger. It can be tempting to reach over our limit when we have an overdraft available. This can lead us to continuous overdraft cycles and significant interest fees. Overdrafts are also less likely to help us with our credit score.
When talking about creating a financial safety net, the inclusion of credit cards may come as a slight surprise. Perhaps it is the stereotypical views about credit cards that would lead to that reaction. The association with lavish purchases, a far-flung holiday, or that expensive pair of boots aren't necessarily fair or justified.
Perhaps you're unfamiliar with credit cards and how they work? With a credit card, you are not using money from your bank or building society account. In fact, the credit card company is paying for your purchases and then billing you for this the following month. If you pay your bill off in full, you will not be charged any interest. If you only make a partial payment then the balance will be rolled over until the next month. You will then have to pay interest on this.
You are required to make at least a minimum payment on your outstanding balance. This is often between 1 - 2.5% of the balance plus any interest charges. Making only the minimum payment each month will mean that you are repaying much more in total with interests. It can also take a number of years to clear your balance if you are only paying the minimum.
To have access to this facility, you will need to make an application. Expect card companies to ask about your level of income and your employment status. You will also have to undergo a credit check. These factors will determine if the credit card company will issue a card for you and what limit you'll get. Credit limits can vary hugely from £100 up to 10's of £1000's.
If used wisely, and responsibly, credit cards can be a key component of your financial safety net. For example, when you are struggling to pay a utility bill, but know that you'll have the funds soon, many utility companies are willing to take a credit card payment. Many major retailers, supermarkets and petrol stations accept it as a form of payment. Having a credit card as a means to 'dip into' as and when needed can be a great addition to your financial cushion. Repaying your credit card balance on time and in full can also help you build your credit score.
If your circumstances mean that you need a comparably larger sum of money, then a personal loan could be the ideal option for you. These are generally offered for amounts from £1000 up to a maximum of £25,000 and are repayable over 1-10 years.
Personal loans are offered by banks and other lenders and will have a lower interest rate than credit cards. Again, the amount you can borrow and the interest rate that you are offered will be dependent upon your own personal circumstances. Access to a loan will require you to meet the lender's eligibility requirements, including a credit check.
Given the repayment options, loans may be the better option if you need to borrow money over a longer-term, and you want your budgeting to be that bit easier; your payment amounts are usually due each month and for a set amount throughout the term.
Personal loans may not be something that you can apply for before you need it as part of planning your financial cushion. What you can do, however, is protect and build your credit rating. By doing this you can ensure that if the time comes when you do need to apply, you have a higher chance of being accepted and of being offered a more competitive interest rate.
With the 3 options that have been explored, it may be difficult to decide upon the right option for you. Rather than considering a single option, the truth is that a combination of these is probably best.
It is important to be reminded that we are not looking at credit facilities as a way to pursue an extravagant lifestyle or to treat ourselves to a special gift. We are, instead, considering these as a financial safety net; something to fall back on when we need to. Not something to fritter away.
With that understanding, it is clear to see how the combination of these 3 options will lead to the most security. Knowing that varying situations may arise where one option is more preferable to another, it makes sense to ensure that we have access to all 3.
Today you may be slightly short of funds knowing that a direct debit is due to be taken from our account tomorrow. If that is the case then having an overdraft facility in place could mean the difference between the payment bouncing or going through.
Tomorrow you may realise that it's going to be tough budgeting for fuel for the rest of the month, but you know that come payday all will be well again. Having a credit card on hand for this situation can keep you on the road.
Perhaps the next day your boiler breaks down. You really are having an appalling week, aren't you? It's not a quick fix and in fact, you need a new boiler that is going to cost around £2000. You know you won't have spare funds in this region come next payday so maybe a personal loan is what works best here.
It's all about flexibility. The wider range of options you have, the more likely you are going to be able to see yourself through potentially tricky times.
The key to your financial health is the ability to budget. Knowing what your income is, and controlling your regular outgoings, means that you can take control of your finances. This opens up the ability to start building up your savings and having an initial financial cushion in place.
Effectively budgeting also means that you are more likely to meet all of your financial commitments. This means no missed payments and so less likelihood of negative entries on your credit report. Why does this matter? As we've touched upon throughout, the credit options discussed are all reliant upon your creditworthiness. Look after your credit rating and you open up the possibility of using all of these options to further cushion yourself. There is no advocating spuriously applying for every line of credit going; the use of credit suggested here is strategic and part of planning for overall financial health.
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