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The credit crunch has been with us in the UK for over a year now and, even though a lot of people tried to deny that it existed and was just a term invented by the media.
Whilst other individuals claim that they have not been affected by the slow down in the economy, a large percentage of individuals and families are now starting to feel the full impact of the crunch, even if they haven’t done so previously, particularly those people who have debts through mortgages, personal loans and credit card balances.
It is not only individuals who are suffering however, many businesses are going through particularly tough times at the moment, leading to increased fears over job security. We have all seen the devastating effects on a large number of the high street banks and other financial services companies, such as loan companies, but the current economic slow down is now having a knock on effect on many businesses in other sectors as well, as many people are starting to cut back on their expenditure.
So if you’re one of the many people who are feeling the pinch and perhaps struggling to keep up with the monthly mortgage and loan repayments, or seeing you credit card balances increasing at an unhealthy rate, or maybe you’re just worried about job security and the possibility of unemployment in an uncertain future, what can you do to avoid falling victim to the credit crunch, or at least limit the damage done to your own personal financial situation, before we see the light at the end of the tunnel.
Budget Planner
The first stage in sorting out your financial situation and creating a bit of stability is to organise a budget planner by carrying out an income versus expenditure exercise.
Firstly, write down your total take home pay and other income from things such as any state benefits for which you are eligible, plus any overtime or bonuses (although you should be careful when including overtime or bonuses as these tend to be the first things to get cut by employers when times start to get tough).
You should then list all your regular expenses, including luxuries and non-essential items, not just bills. Be honest with the list, if you leave things off you are only lying to yourself and the exercise will not be effective. It’s also important to write down each expense so that you can see exactly where all your money is going.
Cut Down On Unnecessary Expenses
Once you have completed your budget planner and have a full breakdown of your income versus expenditure, it may become immediately obvious where it is possible to make monthly savings.
Sadly, it is normally the luxuries in life which are the first things which must be cut back on, such as going out for an evening, gym membership and even (dare I say it?) cutting down on smoking and drinking. Other savings can be made by perhaps changing where you shop for food and planning meals before you go to the supermarket and only buying what you actually need once you get there.
This can make a big difference to the cost of the weekly shopping trip. Another idea is to leave the car at home for short journeys and walk instead, saving on petrol costs and getting you fit at the same time!
Build Up An Emergency Fund
It is important to have an emergency fund of money which you are able to fall back on in the event of difficult times, such as redundancy, sickness or unemployment.
Ideally the amount of this fund should be in the region of at least three times your committed monthly expenditure (the things every month which you have to pay, such as personal loans, mortgage and utility bills) to help you get through until you get back on your financial feet. A larger sum is or course better, but even a small amount of money put to one side can make a difference to the situation and reduce the potential of increased levels of debt.
Maintain All Protection Plans
One area of your monthly expenditure which you should definitely not cut back on is the regular payments made on any type of protection plan, or insurance policy you may have. This could include payment protection policies, income protection, or life and critical illness cover.
At times when money is tight, these are often the first things to be cancelled, but they were all taken out for a reason, usually this is to protect your family and mortgage or loan repayments in the event of anything untoward happening to you and it is vital to maintain these contracts in order to keep the benefits and peace of mind which they offer, particularly in an uncertain world where unemployment is increasing and high levels of debt can lead to health problems.
If you do not have any such policies in place, you should contact an independent financial adviser who can offer suitable advice on the cover and type of products you need. Even if you already have some policies in place, it is worth while reviewing exactly what benefits and level of cover these offer, to make sure they are still adequate to meet your requirements.
Maintain All Loan Repayments
It is essential to keep up to date with all the repayments on your personal loans, mortgage and credit cards bills, as this will keep your credit score at a higher level.
Falling behind with loan repayments, or even making them a few days late of the due date, can have dire consequences for your future ability to be accepted for any type of credit or loan, as each missed or late payment will leave a mark on your credit record, reducing your overall score.
In addition to this, late payments and arrears on loans and cards usually incur a penalty charge and in some cases, additional interest. In the worst case scenario, getting into arrears on your mortgage, or a secured loan, can eventually lead to your home being repossessed and even with unsecured loans and other debts, a build up of arrears and missed payments can lead to County Court Judgements (CCJ’s) and stop you from obtaining future credit.
Clear Credit Card Balances And Overdrafts
Credit cards are, in most cases, undoubtedly one of the most expensive forms of credit available, along with bank overdraft facilities.
Both of these methods of borrowing charge one of the highest rates of interest around and even when times are good, these should be the first things to be paid off, but in the current economic climate this is even more important.
It may be all very well to say just pay off your credit card debts, we all know that it’s not that easy, if it was, nobody would have any debts at all and you wouldn’t be reading this article! But there are options to get rid of credit card balances.
Ideally you should concentrate on paying more than the minimum required monthly repayments, in order to clear the balance quicker and save further interest. Other options available would be to transfer your credit card balance to a new card which offers zero per cent interest for a certain period, allowing you to clear the debt over a period of time without paying exorbitant levels of interest.
If this is unavailable to you, another option could be through a debt consolidation loan. Although this option would still charge interest, the amount charged is likely to be considerably less than that of a credit card. Check the rate payable both on the loan and your card to ensure this is the right thing to do, before you sign up.
Debt Consolidation Loan / Remortgage
If you are in a situation, as many people are, where you have several different loans and credit card balances with a number of providers, all paying reasonably high levels of interest, it may be possible to cut your monthly expenditure by bringing all your various debts together with just one provider by taking out a debt consolidation loan.
This option could work out significantly cheaper and also much easier to manage every month, as the interest rate charged is likely to be less than that of the debts being repaid, particularly if you opt for a secured loan and you will only have to make one payment each month.
As an alternative to a debt consolidation loan, you could opt to re-mortgage your home to consolidate your various loans and cards that way. If you have early redemption penalties which would be applied to your existing mortgage, this may not be a realistic option, however your existing lender may be able to offer a further advance on your existing loan.
You should take care with either of these options however, as by consolidating existing debts, in many cases you will also be extending the term of any existing commitments and although the monthly repayments may be considerably lower on the new loan, these will be made for a longer period, with interest also being charged for longer and you could actually end up paying significantly more over the long term than you would have done on your original debts.
Still In Difficulty?
If you are still struggling to keep up with the repayments on loans, mortgages and cards and are worried about falling into an arrears situation, you should always contact the provider in the first instance.
A lender will look favourably on someone who approaches them when financial problems first arise and will take a sympathetic view to your problem, offering help and a solution wherever possible.
The worst course of action is to bury your head in the sand and hope the problems will go away, this is the most likely route to having a CCJ issued against you, or even the possibility of repossession.
Help on financial matters can also be obtained from places such as the Citizens Advice Bureau and debt counselling services. Before taking out any new plans or loans, it could well be beneficial to seek professional advice from an independent financial adviser (IFA), who is able to select products and offer advice across the whole of the market.
Finally, you should think very carefully before committing to any particular one course of action, as it is often difficult to undo something once you have started. Weigh up all the pro’s and cons of the various options and make sure that the one you take is the best possible route to meet your own personal needs and requirements.
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