What if I’m relying on credit to get by?

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This week is Debt Awareness Week, an annual campaign run by StepChange Debt Charity to raise awareness of debt problems and help people find free support with their financial ‘What Ifs’. They can help you take the first step towards resolving your money worries with free, impartial advice.

Using credit isn’t necessarily a bad thing – it can help you spread the cost of large purchases and managing it well can help you improve your credit rating.

However for many people, using credit to pay for anything and everything is pretty much a way of life. But it’s not sustainable, and relying too much on credit may be a sign of financial distress, and could lead to a more serious debt problem. 

Let’s look at some of the warning signs:

1. You’re using credit to pay for things you can’t afford, or in emergencies

One of the upsides of credit is that you can make the purchase sooner rather than later – great when you’ve got birthday presents to buy, or you’re hit with an unexpected repair bill for your car.

But you're likely to be paying interest on these purchases. And if you can’t pay off the debt quickly and the interest rate is high, you could end up paying a significant amount more.

Understanding your budget can help you put away money each month to pay for those large expenses – some banking apps (like Monzo!), let you create separate ‘Pots’ so you can keep these savings separate from your main account balance, so you don't accidentally spend it!

We know emergencies happen, and sometimes there’s no choice but to put unexpected costs on your credit card. But if you’ve already got a high balance, this could make the situation even more serious. Having an emergency fund can really help with this and allow you to build up some financial resilience, so you’re better prepared.  

2. You can only pay the minimum amount each month

When you take out a credit card, minimum payments can seem pretty appealing – and they can be useful, giving you some flexibility if money is tight. But if you’re consistently making the minimum payment over a long period, you’re accruing more interest and charges, while only paying off a very small amount of your balance. 

What’s more, if you’re making minimum payments consistently for 18 months and you clear either none or very little of the balance itself, this is what’s classed as a ‘persistent debt’. If you continue to only make minimum payments for another 18 months, your creditor may have to increase the minimum amount – and in some cases they could take the credit product away altogether.

If you’re concerned about minimum payments and persistent debt, StepChange’s repayment calculator could help you work out how much quicker you could clear your balance by increasing your payments by even a small amount.

3. You buy most of your clothes with store cards or ‘buy now, pay later’

Obviously shopping in-store isn’t an option at the moment! But it's important to be aware that the ‘buy now pay later’ options available at lots of online retailers are a form of credit. 

And like with any kind of credit, it’s a good idea to ask yourself these questions before you buy now, pay later:

  • Is the purchase within your budget?

  • If the buy now pay later option wasn’t available, would you still buy it?

  • Is the item a necessity?

  • Can you wait until you next have money to spend?

Remember, interest rates can be high so you could end up spending more in the long run. And if you don’t pay on time, it could impact your credit score.

If you’re worried about making buy now, pay later payments, there’s lots of information to help on the StepChange website.

4. You’re bouncing from one credit card to another

In some circumstances, paying off your current debt balance with another credit product can be positive. In fact, if you have a persistent debt, it’s worth considering paying it off with a credit card that has a lower interest rate.

Sadly, some people can get caught in a trap of transferring their balance from one credit card to another, and then another, and so on. This can often become confusing, and it’s easy to lose track of which card you owe money on and which card you should cancel.

Once you’ve paid a balance off, it’s best to cancel the old account as soon as possible. That way, you won’t be tempted to start spending on it again, which often results in a bigger debt problem.

5. You’re constantly in your overdraft

Arranged overdrafts are designed for you to dip into them occasionally, to help with emergencies or short-term problems. However, our research has found that millions of people are constantly overdrawn and locked into a cycle of borrowing that’s hard to break free from.

Overdrafts often have high interest rates and getting ‘stuck’ in one can be a warning sign that you might need debt advice, especially if you find yourself using it to pay for basic living costs.

Constantly falling into an unarranged overdraft at the end of the month, where you spend more than what’s in your account or go over your overdraft limit, can also hint at a problem.

Putting together a budget is the first step to taking back control of your overdraft. This will help you plan your spending so you can reduce your reliance on your overdraft.

It’s important to remember that overdrafts are still a debt, even if your lender isn't charging you for having one.

What if I’m stressed about my finances?

If you’re worried about money and debt, talking to someone you trust or reaching out for free, impartial help is a good idea. We’d also recommend speaking to your creditors, as there may be ways they can help you. 

No matter how big or small your problem, StepChange can help. They offer free, impartial advice as well as help with budgeting, managing a persistent debt, and help to get back on track if you’ve been financially affected by coronavirus. Visit www.stepchange.org to take the first step.