CREDIT CARDS – A BLESSING OR A CURSE!

Earlier generations could not spend money they had not already earned, because they had no choice! The invention of credit cards has changed this. They provide a useful tool but also one that can easily lead to disaster. As with any tool they work well when they are used properly. Using a credit card for on-line purchases, for an alternative to cash when you are travelling abroad, etc. are all very valid. But one has to hold the line and make sure that one pays off the amount owing in full each month when it is due. It can become very difficult to clear credit card debts once they are allowed to build up and the interest is increasing.

Attack the Plastic

One of the unhappy after-Christmas and New Year “surprises” is the arrival of the credit card bills for the Christmas spending. Of the various financial tools available, the one we find most misused and most destructive are the credit card and store cards. A credit card used properly can be a very useful way to make purchases on-line, or when you are abroad, or to take advantage of a special offer. If you then pay the credit card balance off in full, you will have had 4 to 6 weeks free credit and will have avoided the “honey trap”. If you do not pay it off in full, it is all too easy to fall into the habit of just paying minimum payments. Paying minimum payments of 2% or 3% of the balance is an invitation into NeverNeverLand, as it will not pay off the debt and you will end up having paid an enormous amount of interest, while the credit card balances remain unpaid. If you need credit and are not going to be able to pay it off in full, use a loan. They are structured to ensure that the amount owed does really get paid off.

Warning - plastic may damage your wealth!

As we move into the Christmas spending season, do remember that credit and store cards should be paid off in full each month. Otherwise the outstanding amount owed can hang around for many Christmases to come.

PAYDAY LOANS AND CREDIT UNIONS

There has been considerable controversy about payday lenders providing small loans at very high interest rates. Even the Archbishop of Canterbury has entered the fray. It has served to highlight one of the lesser known type of financial institutions – the credit union. These are small non-profit financial organisations set up by members with something in common and with the intention to benefit their community. The common factor might be those living in the same area or working in the same industry. If you are interested in finding out about credit unions near to you, search on www.findyourcreditunion.co.uk.

Savings/Investment Tips

1. Don’t put all your eggs in one basket. 2. Do your homework. 3. Don’t gamble with money you can’t afford to lose. 4. Don’t be greedy. Expecting very high returns can expose you to very high risks. 5. Invest for the Long-Term. 6. Include tax planning in working out your savings and investments.

Financial Checklist

When reviewing your finances, here are some points to consider: 1. You need to arrange your income and expenditure to ensure you have more coming in than going out! 2. Save for a rainy day. You need to build up a surplus. 3. Virtually everyone should make a will. It is estimated that 30 million people in the UK have not done so! 4. Review your finances (including your mortgage rate and your savings interest rates) at least once a year. 5. Plan ahead. The odds are that you are going to live a long life and you need to plan how you will pay your bills when you no longer are able/want to work. 6. Take professional advice when dealing with major financial decisions – house-buying, pension arrangements, long term savings.

SUGGESTIONS FOR THE NEW YEAR

Review your mortgage interest rate. If you find that you are on the Standard Variable Rate with your lender (4.25% to 5.0%), contact us for quotes as you should be able to save 1% to 2% and that can mean quite a bit of savings each month. Lenders are having to compete more for business now and that means a better deal for the borrower. 3 and 5 year fixed rates are looking very competitive. As independent mortgage brokers we can help you find the best deal.


Review your pension. By survey almost half of the working population have never reviewed their pension plans, even though the majority of those contacted did say that they considered it important to know how their pension funds were invested. A failure to review your pension can leave you exposed to inappropriate investments and also prevent effective planning for your retirement income when you reach your 60s and 70s. It is also valuable to get a State Pension Forecast. We are available to help with this.

Get rid of any credit card debts that are hanging around. The temptation to pay just the minimum payment is intense and the credit card balances then do not go away. It is much better to organise a loan over a few years with fixed payments and pay off the credit cards. That is not to say that a credit card cannot be a useful tool, but you need to be disciplined and pay the full balance off each month.

If you are a 40% taxpayer. Do take the maximum advantage of your pension contributions to reduce how much you pay in tax.

Take advantage of your Individual Savings Account Allowance – Particularly the Cash ISA, so that you build up a cash cushion (and generally get a better rate of interest on your savings).

If you have an interest-only mortgage - Review it carefully to ensure that it will not become a problem when you reach the end of the mortgage term. It is wise to act early rather than ignore the problem until it is close upon you.

Review your insurances. If your circumstances have changed since you last took out life assurance, you may need more, or less, life assurance to meet your needs. One immediate benefit, however, is that the minimum technical requirement for those advising on investment, pensions and annuity has been increased. While examinations are not necessarily a true measure of understanding and ability, they can have value. Another change is that investment, pensions and annuity advice will now be charged for on a fee basis, rather than being paid by commission, as was generally the case before.

The intention is to bring the profession in line with other professions such as solicitors and accountants. We will need to see how the public responds to this major change. Advisers in 2013 will also be split into two groups –those who provide independent advice from across the market and those who provide advice restricted to certain parts of the market. Sovereign will continue to provide independent advice.

For speedy, impartial advice, contact us on 01342 313302.

Start saving: Time to take action

Total UK personal debt had reached £1,452bn by January 2011, according to figures from Credit Action – more money than the whole country produces in a year and a sum that equates to nearly £8,500 per household (excluding mortgages).

Contrast that with the nation’s current savings levels, which have seen the average household save just £996 over the last 12 months – or £2.73 a day. However, in an environment where it has become the norm – and, until recently, all too easy – for individuals to make purchases with debt, changing this ‘enjoy now, pay later’ mentality is going to be difficult.

You may be sure, however, that the coalition government is keen to encourage such a change. Work & Pensions Secretary Iain Duncan Smith has been quoted as saying: “We do not save enough in this country…it is appalling, and changing the culture is critical.” Right now, the main incentives to encourage such saving involve limiting the amount of tax you pay on certain savings products. Certainly, the Government needs to do more if they are going to generate the kind of interest that will push more people to act.

Yet, if there was ever a good reason to start changing our behaviour, it is surely the fact it costs the average household £2,500 a year in net income just to meet its interest payments. That is approximately 15% of the average net wage going to lenders that could otherwise be heading into our pockets. That fact really should be an incentive to start saving.

Time to take action

Total UK personal debt had reached £1,454 billion by November 2010, according to figures from Credit Action – more money than the whole country produces in a year and a sum that equates to around £8,500 per household. Contrast that with the nation’s current savings levels, which have seen the average household save just £996 over the last 12 months – or £2.73 a day. However, in an environment where it has become the norm and, until recently, all too easy for individuals to make purchases with debt, changing this ‘enjoy now, pay later’ mentality is going to be difficult. You may be sure, however, that the coalition government is keen to encourage such a change. Work & Pensions Secretary Iain Duncan Smith has been quoted as saying: “We do not save enough in this country…it is appalling, and changing the culture is critical”. Right now, the main incentives to encourage such saving involve limiting the amount of tax you pay on certain savings products. Certainly, the Government needs to do more if they are going to generate the kind of interest that will push more people to act. Yet, if there was ever a good reason to start changing our behaviour, it is surely the fact it costs the average household £2,500 a year in net income just to meet its interest payments. That is approximately 15% of the average net wage going to lenders that could otherwise be heading into our pockets. That fact really should be an incentive to start saving.