StepChange #debtmyths

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StepChange_James wrote: »

The myth: You can borrow your way out of trouble #debtmyth #debtawarenessweek

The reality:
If you’re struggling with your personal finances then taking out a new loan to help you cope can seem like a sensible solution. Whether it’s a payday loan or a bank loan, the extra money will be handy to begin with but it soon goes and then the repayments kick in.

I know you are perhaps pitching this advice at those who are not expert at managing their personal finances, and who cannot resist the temptation to spend on credit, but I think it is worth saying that if you do have the ability to manage well and the discipline not to use large credit lines that you may have organised for yourself until you really need them, they can be exceptionally useful in times of short term crisis e.g. for 6 months it might take to find a new job following redundancy or similar. A bank loan of course (unless it is "flexible, or a "credit card" or part of an offset mortgage arrangement not a credit line that you are actually able to leave unused. But the exceptions I mention most certainly are, and there may be others.

Perhaps I am not typical, but in the early 90s when I suffered my first redundancy after 15 years of solid working and advancement straight from uni, I swore then that as soon as I got another job I would systematically build up my creditlines to such an extent that I would be beholden to no-one if it happened again. In the mid 90s of course the credit card market in the UK went haywire with new entrants and companies like Barclaycard actually discounting balance transfered debt just to grab or retain market share. Almost every week an invitation to a new card dropped through the letter box. I took them all and it helped me enormously in the long run just as I planned. I built up credit limits by the year 2000 through which I could have paid cash for a £60,000 house and barely paid any interest by constant balance transfers and taking advantage of 0% interest periods. I could of course have driven around in a fancy car instead. But that's not me. I was cautious. I should have bought a BTL house with it as it happens. Instead I put it into premium bonds.

A few years later I did need to buy a second property (not BTL) and was already mortgaged on the main property to the extent that a second mortgage wasn't really feasible. I bought the second property on credit cards! But I realised the risk that the credit card market would harden and rationalised that debt as fast as I could as a proper mortgage, but to buy the property I needed to speak with no-one. I was effectively a cash buyer and got a very good deal.

If I showed you which periods I had an income and which I didn't during all that, some might be horrified, but I absolutely needed to do what I did (no one "needs" a Range Rover Vogue - yes I've driven one for a weekend but the hire company handled the depreciation aspects! - but I did at one point need a city pied a terre so I could manage my long hours job and my life). Holding large creditlines in this uncertain world has enable me to "smooth" the good times and the bad times.

No way is what I did suitable advice for the many, but during the good times do think about how you might stay in control when times might become leaner. You may have to be very disciplined not to spend creditlines as soon as you acquire them. I am very lucky that my parents were always extremely thrifty and I think it rubbed off plus I was very lucky to develop some interesting pastimes that made me happy without spending great wedges of dosh. But, if you are reading this and thinking you never had it so good, then don't just save for a rainy day - build creditlines for a rainy day. Since those times with high credit card limits (maybe it is much more difficult to build up large limits on multiple cards now?) I have used a low rate Offset mortgage in much the same way a couple of times.

Taking out a new loan to cover existing debt payments is one of the five danger signs of a debt problem. You can read more in our article about the dangers of borrowing to cover debt payments: http://moneyaware.co.uk/2014/01/taking-loans-to-cover-payments/.

I agree with this wholeheartedly of course. If you are already in a hole, then that is not the time to seek new creditlines. You must instead seek to draw in your horns and seek advice quickly.

I hope some people might be able to draw something from my experience however. I know I felt much more confident the second time I got made redundant, and the third

fermi

Blueskies2014 wrote: »

I am very upset and stressed. I was told by Step Change to advise all of my creditors I am in financial difficulty. I didn't realise that by advising my bank that they would immediately withdraw my overdraft facility, which has happened.

Moved to this thread for help --> Struggling with debt? Ask a debt advisor a question

Also copied to a new thread here so forum users can help --> Overdraft withdrawn - now no money