Debt Fears for UK Consumers who rely on Credit

By: MoneyFacts

Consumers are living on the edge by relying too heavily on credit and failing to put aside sufficient savings, according to a recent survey*. Moneyfacts.co.uk warns that those who don’t plan their repayments or, in the worst case scenario, lose their main source of income, could therefore find themselves living in fear of their debts as their credit spirals out of control.

The research found that three-quarters of consumers who fall into debt rely on credit cards and overdrafts, or borrow from family members, to keep on top of their spending. However, these are only short-term coping mechanisms.

According to calculations by Moneyfacts.co.uk, an authorised overdraft carrying a £1 daily usage fee would mean that borrowing £100 for 15 days would incur 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.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“Building up a safety net is key to ensuring that credit isn’t used as a short-term funding solution. 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 as part of a regular financial health check and review their debts regularly. This way, they may be able to avoid trouble before it’s too late.”

*StepChange’s latest figures. Released 10 December 2015.

www.moneyfacts.co.uk - The Money Search Engine

Moneyfacts.co.uk is the UK's leading independent provider of personal finance information. For the last 20 years, Moneyfacts' information has been the key driver behind many personal finance decisions, from the Treasury to the high street.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.