Financial hardship creating generation of borrowers
People running out of cash before pay day could be stacking up high interest by misjudging the way they use their credit cards and overdrafts as a backup, according to research from MoneySupermarket.com.
The UK comparison site asked consumers where they turn when they run out of money, and found nearly half (41 per cent) have used an authorised overdraft or extended their existing overdraft to make ends meet in the past. Over a third (39 per cent) have been forced to dip into their savings, and a further 27 per cent have used their credit card to tide them over.
MoneySupermarket also calculated the additional amount in interest those turning to credit cards and overdrafts would pay, and found someone using their authorised overdraft (after introductory offers) of £500 for one month with Halifax would accrue charges of £30 in a month, or £360 in a year, while Santander would charge £20 a month, or £240 a year. Turning to plastic instead, with an average credit card rate of 17.69 per cent (once introductory offers had expired) someone spending £500 would incur a charge of £77.28 over a year if only minimum repayments each month were made.
Kevin Mountford, Head of Banking at MoneySupermarket.com, said: "The rising cost of living over the past few years has hit many people hard and it is easy from time to time to find yourself running short of cash and having to turn to existing savings or other forms of credit to tide you over. Our research shows that four in ten people will turn to their savings pots as a backup for extra cash, which is reassuring. However, for those relying on credit cards or their overdraft as a fall back until pay day, as our findings show, it really does pay to research your options and think about the additional interest you could end up forking out, beforehand. While using a credit card for everyday expenditure can be an effective way for people to manage their finances and build up their credit rating, it is essential they pay the balance off in full at the end of the month to avoid building up unnecessary interest. Using a 0 per cent purchase credit card can also help spread the cost of spending over the period of the offer, but you need to pay off the balance before the promotional rate ends. Don't be tempted to use a credit card to get cash from an ATM as this will cost you dearly.
"While turning to an authorised overdraft may be a good option for some, fees and charges on bank accounts do vary considerably, so if you dip into your overdraft often, it is worth making sure the account you are using is suitable for your needs. Agreeing an overdraft with your bank before utilising it is vitally important, as dipping into an unauthorised overdraft is far more expensive."
The research also reveals that more and more people have turned to borrowing money from their friends and family, with almost a third of respondents (27 per cent) claiming to have ever done so. This is compared to a fifth (20 per cent) of those asked last year. Those aged between 18 and 34 seem to be the most willing to ask their friends and family for a bit of extra cash, with 41 per cent having done so to keep them going.
Kevin Mountford continued: "It is unsurprising that more and more people are turning to friends and family to ask for help when they have run out of money, especially among the younger age groups where gaining credit may be more difficult. However, people need remember that when borrowing money, it is essential to make sure you can pay it back, and that any debt incurred doesn't spiral out of control. For those who are continually struggling to stay out of the red before pay day each month, I would advise spending a few minutes to check through all outgoings, in order to work out where savings can be made. Reviewing your personal finances to see where savings can be made can help you release vital cash which can help alleviate the financial pressure."