Cut up the credit cards
We’re glad you’ve realised that credit cards can be damaging to your financial health, but cutting them up and swearing never to use them again is actually throwing out the baby with the bathwater. First of all, credit cards can be a lifeline in an emergency. Yes, it’s better if you have enough savings for an emergency but if you don’t credit cards been other options, like payday loans, by a long margin. Secondly having a credit card means you can avoid putting your debit card details on the net. Having a credit card compromised is an unpleasant experience, but having to change your entire bank account is probably a whole lot worse. Thirdly, even without any added perks, credit card purchases of over £100 are subject to extra protection under section 75 of the Consumer Credit Act. This is in addition to the chargeback schemes run by card companies themselves. Finally, for better or for worse, credit scores matter. In addition to helping determine if you get accepted for credit at all, let alone at what rate, they can also be checked by landlords and employers.
Pay down debt
Now this may seem like a bit of a strange comment, so let us explain. Rather than just deciding you need to pay down your debts, you need to take a long, hard, look at your current financial situation and determine:
• What debts you have
• What kind of debts you have
• How you acquired these debts
• What savings you have in place
If you have no savings at all, then counterintuitive as it may seem, it may actually be in your best interests to work on building a cash cushion first, before you really start to tackle your debts. That way, you’ll be in a much better position to deal with life’s slings and arrows without resorting to more credit – assuming you’re in a position to get it. Once you have this in place, you need to look at what debts you have an how much they are costing you. Then look at what kinds of debts they are and why you acquired them. For example, racking up credit card debt due to an expensive holiday is very different from having a mortgage to pay off. At that point and only at that point, can you start to tackle high-interest consumer debts such as credit card debts. Start with the highest-interest debt first. For lower-interest debt, such as mortgages, a bit more judgement is called for. If you’re confident of your ability to pay off your mortgage over the long term, then you may wish to look at investing your disposable income for better returns over the long run, for example, by paying extra into a pension scheme. If, however, you are less confident about this, then it may be better to pay as much as you can into your mortgage so that you are in a better position if your circumstances change and if you are really unsure about your ability to manage your mortgage over the long term, you should, perhaps, look at renting.
Save for a rainy day
The UK has lots of rainy days, how much money will you need to cover them? Having cash savings does have a lot of benefits and it’s generally a good idea to have some. Just shoving your money into a savings account, however, could see you miss out on better investment opportunities. Think hard about how much money you feel you need, in your situation, as a cash cushion for foreseeable expenses and emergencies. Once this is in place, however, ask yourself seriously whether cash savings are still your best option. If necessary, get some professional advice on this.
