Government Aims To Address Debt Burden Through No Interest And Extended Repayment Schemes

According to the Office of National Statistics, for the first time in 30 years, UK households have collectively spent more than they have earned in 2017. Their total expenditure for the period came to on average £900 more than their income; thus pushing them into a financial deficit for the first time since the credit card boom of the 1980s. The deficit, which amounted to nearly £25bn, was equivalent to almost a quarter of the NHS budget. Though most households fell into the cycle of overspending with the money they had borrowed, a number of the households also ran down their savings.

The government, in its autumn budget, announced new measures to help citizens in debt. Referred to as the ‘Breathing space’ scheme and the ‘No-interest loans’ scheme, these measures aim to tackle the problem faced by about three million people in Britain, who are facing the pressure of debt caused by borrowing from high-cost lenders such as payday and credit card companies.

Currently, over 16.8 million people in Britain have less than £100 savings. This leads to financial stress and takes a toll on their mental health. Over a million people turned to high-cost credit last year to meet their basic living expenses, which is in the end counterproductive both for households and the country’s economy. The problem of high-cost credit is intensified by insecurity in the labour market and the growing use of zero-hour contracts. This, in turn, implies that when people do not plan their budget and overspend, they get into debt, as they have no savings. This will have a negative impact on their credit ratings, distancing them even further from fair credit opportunities.

Therefore, the UK government, working with leading debt charities and the banking industry, has decided to launch a feasibility study to help design a pilot for a ‘No-interest loans’ scheme in early 2019. While, under the other ‘Breathing Space’ scheme, people who are in debt will get a 60-day period of protection against creditor action. This will give them more time to seek advice and make plans to repay their debt in a manageable way.

The decision makers drew inspiration from the No Interest Loans Scheme of Australia, which provides people with low incomes access to safe, fair and affordable access to credit. The scheme offers loans of up to $1,500 for essential goods and services and not for cash. Repayments are structured over 12 – 18 months. There are no interest charges or fees.

Though there are many organisations imparting financial education to create awareness for lowering debt and increase savings, there is a need for a strong practical solution that can work alongside these plans. FairQuid, a financial wellbeing platform, believes credit unions play a central role in tackling these issues.

Currently, credit unions in the United Kingdom could help millions of Britons who are excluded from mainstream finance. They play an important role in facilitating savings and offering affordable loans to their members. The Financial Conduct Authority (FCA) regulates credit unions but as they are run for the benefit of members, not shareholders, they can offer ethical saving schemes, competitive loans and other financial products, not usually available to individuals excluded from traditional financial organisations.

The FairQuid Wellbeing Platform has been designed to work in tandem with employers to develop innovative solutions that benefit both credit unions and employees. It is a win-win situation for all. The platform educates employees about personalised financial tools to make better finance-related decisions and take control of their finances. On the other hand, for employers, it prevents mental health issues in workplace, boosts engagement levels, and increases employee retention.

The budget also has a provision to support this credit union sector. To help people increase their financial resilience while boosting awareness and membership of these community organisations, the budget commits to launch a pilot of a new ‘prize-linked saving’ scheme for credit unions.

By helping households manage their unexpected costs through increased access to fair and affordable credit, and motivating them to create a safety net of savings, the government is taking a big step towards its citizens “being and feeling financially secure, today and in the long run.”

How to start saving more in 2018: Credit Unions

Everyone likes to save money. We compare our providers before we insure our cars, we shop around for the best mortgages, and we even betray our local supermarket in the hunt for a better deal – all in the effort to save ourselves money.

Spending less money is consistently one of the top New Year resolutions, with 37% of us this year citing it as one of our resolutions (see chart below), suggesting that we still believe there’s more to be done to protect us from ourselves. Whether we’re splurging on nights out, restaurants, new clothes, or takeaway lunches, there’s always somewhere we can trim the fat.

But say we swap that Pret a Manger for the bento box? Research suggests that we could save thousands a year by bringing our own meals, snacks, and drinks instead of buying them on the go, between £2,000 and £4,000 and upwards. £4,000 spread over the year is about £333 per month, or £77 a week: not a figure to overlook when trying to save (and, of course, most of us will save a lot less than that, since savvy spenders are unlikely to be spending £77 a week on a couple of coffees and a meal deal). How we find ways to save money is less important than what we do with those savings.

With dribs and drabs remaining in your bank account, it can be tempting to dip into the leftovers for treats, or, even worse, to forget that it’s money you’ve made an effort to save, then only to spend it without thinking. If you’re looking to put money aside – either to hoard for an emergency or to build up for a larger expenditure (e.g. house, new car, holiday) – then you probably want your money somewhere else where you can’t get dip straight back into it.

“Chipping away at your savings can make them not only disappear quickly but seem as if they were never there in the first place”

The logical step is to separate your savings from your spendings. Out of sight, out of mind, right? 

Transferring the savings you make to another bank account is an easy way of separating your money. Both current and savings accounts can offer interest on your balance, and there are plenty of comparison sites that can show you the best interest rate. Remember, these may vary depending on the balance, and there may also be other limitations, such as a minimum or maximum deposit.

The most convenient thing about theses current and savings accounts is that they offer easy access to your savings if you need them. However, if you have a specific deadline or goal in mind, then this might not be the best option: if you dip in when you “need” to, then you’re unlikely to see your savings pot grow.

Another option is closed access savings, including ISAs. These also have the added benefit of a higher interest rate, so the more you put in, the more you take out. Your rate will also increase with the length of the term you squirrel your money away for: five years will accumulate more interest than money only going away for one year. Most accounts will allow you to withdraw your money early – but this will come with a fee, and is likely to negate all of the interest you’ve earned so far.

Savers may also be subject to other limitations, such as the minimum amount you can place as an initial deposit, and whether you can add to the pot regularly (via standing order or a transfer when you have some extra funds) or if it only allows a one-time payment.

An alternative to traditional “big bank” saving is credit unions. These collectives originally grew out of a way of helping everyone in the same community – whether that be those in the same area, same profession, or working in the same company. Approximately 1.7 million people in the UK belong to a credit union. These are nonprofits, designed to help everyone, regardless of their circumstances, take control of their finances by saving what they can and borrowing only what they can afford to repay.

Whereas traditional banks use your money to create a profit for themselves and their shareholders, credit unions are based upon the mutual benefits for their members. And the fact that credit unions are protected by the FSCS makes them just as secure as banks.

Credit unions repay their members with dividends rather than interest rates, although some larger unions offer an AER (Annual Equivalent Rate). While banks can only take money that is left over from your wage (whether that’s a fixed sum you’ve decided to transfer in immediately after payday, or whatever’s left over just before), credit unions working in partnership with FairQuid can save your money before it’s even hit your bank account. By taking the money straight from your wage, you can budget what’s left over knowing that you’ve already put aside your savings before you begin spending. For more information on an easier, safer way to save click here.

Broken Heart, Broken Credit: Making Sense of Credit Scores

Loans, store cards, credit cards and mobile phone contracts seem like a great idea when you are in a happy relationship.

But when things go wrong, which can happen at any age, monthly payments can turn into hazardous liabilities that can trip you up years later. Taking out credit – which includes phone contracts – for someone else is always risky, even when you are married.

Even if someone else is giving you the money to cover the payments, the debt is still yours. You are legally responsible. One such example is a guy who used his good credit score to get a phone for his girlfriend at university. Let’s call him Andrew. He took out a 12-month contract for her, but six months later, they broke up, and both of them moved to different flats.

A Series of Unfortunate Events

All of the bills were going to their former address. He didn’t change the billing address, and she stopped paying him. He wrongly assumed she would take over payments – which anyone can do, even without access to the account or needing to pass security questions. Maybe she did for a while, but at some point, she stopped paying, and he wasn’t paying anymore.

It took another six months for the debt to catch up with Andrew. When it did, it was over £150, including late payment charges and collection agency fees. He paid it and assumed the situation was dealt with. It was hard enough breaking up with his girlfriend, never mind the added pain of paying off her phone contract.

He was wrong to assume the debt situation was over.

Six years later, after climbing his career ladder, promotions and stable employment, Andrew’s credit has finally recovered. It has taken six years of being careful with money and not being able to get much credit for the one ‘black mark’ to stop affecting his ability to get loans, credit cards, store cards and a mortgage.

Making Sense of Credit Scores

Andrew is not alone. Millions of people – for one reason or another – have limited access to credit as a result of bad scores preventing us from accessing finance many of us can, on current salaries, easily afford.

For many people, credit scores are like a black box. Black boxes constantly record numerous data inputs on planes. In the same way, credit reports record data from numerous sources: our bank accounts, credit cards, phone companies, utility companies, store cards, mortgages, and any applications to apply for more credit.

Most of us don’t know our credit scores. However, you can find out easily enough – using ClearScore (free), Experian (free trial – but remember to cancel) and other free tools. But if you don’t know, yet want to apply for something, such as a loan or credit card, you run the risk of damaging your credit further thanks to marketing from banks and other companies that suggest you will be successful.

Aggressive tactics and offer target those most vulnerable, and more likely to need credit quickly. When people are denied, it can be tempting to try payday lenders, and others that offer money at an extortionate rate. When your credit has been damaged, but you are rebuilding, and in steady employment, payday lenders should not be your only option.

There is an alternative solution, thanks to FairQuid: Your Wages Your Way. If you’ve been employed for at least one year at your current employer, you can apply for a loan through credit unions that take employment history and salary into consideration.

We don’t base everything on credit scores. You also get an automatic saving account as part of this loan: starting from a minimum of £10 per month, with payments for both coming directly from your salary, making budgeting easier. All your employer needs to do is verify your employment and adjust your payroll if you are approved. It doesn’t cost them a penny. Find out more and apply here.

Payday lender to pay £34m to customers

Today it has been reported that Payday lender, CFO Lending, has agreed with FCA to pay £34 million to 97,000 customers for its unfair trade practises. Some of the unfair practises being referred to are overcharging customers, sending threatening letters, and failing to help customers who found themselves in financial difficulty. More detailed list can be found here.

News like this affirms our belief and strengthens our resolve that we are on the right track. FairQuid’s Credit Union partners are a good viable alternative to consumers falling prey to payday lenders in their times of financial need. We not just help with short term borrowing needs but also help in creating a savings kitty that can be relied upon for future needs (even though it may mean you don’t come back for another loan the next time, but that is ok with us). More details on the scheme can be read here.