In the first of our three-part blog series, we explored what short-term credit is and touched on how it’s affecting us as a nation and individually. In the second instalment, we’re delving further into the real impact of short-term credit.
If you missed the first blog in the series, catch up here. Up to speed? Read on to find out the actual cost of short-term credit.
How is short-term credit impacting us as individuals?
There is no doubt that short-term credit has an impact on many areas of our lives.
Some people can take out a credit card, pay it off each month and barely give it a second thought. However, in many cases this first step into short-term lending will kick off a downward spiral that’s hard to escape. And it’s not necessarily your fault.
Before you take out short-term credit, be wary that it can swiftly lead to spiralling debt, stress, bad credit, and much more. After all, it’s wise to understand exactly what the risks are before you apply for a credit card or overdraft.
This way, you can approach the situation candidly and consider carefully whether you’re likely to keep – or lose – control of this form of credit.
What are the financial impacts of short-term lending?
Short-term lending can rapidly descend into long-term debt if you underestimate, or fail to understand, the risks. Your credit card or overdraft limit can seem like an invitation to spend, and it’s easy to forget you must repay – with considerable interest.
Credit cards and overdrafts come with high interest rates, and the amount you owe can quickly escalate if you don’t keep up with repayments.
Be sensible about what you can afford to borrow and repay. Also, be mindful that you may be charged higher interest rates if you have a lower credit rating.
Take a realistic approach and never stretch yourself too far, or you can soon feel trapped in the borrowing cycle.
Once you find yourself stuck in this cycle, it can be hard to get out of if your income doesn’t cover repayments.
Plus, every repayment missed will negatively impact your credit score, which may come back to haunt you when you apply for credit in the future.
If you already have a credit card, be disciplined with yourself and stick to the following non-negotiables:
Always pay more than the minimum repayment (remember, the minimum repayment amount is intended to keep you in debt)
Never miss a repayment date
Never withdraw cash on your credit card
Stay below your pre agreed credit limit
Do not take out too many credit cards
Similarly, if you have an agreed overdraft, never exceed the limit and only use this service in an emergency, rather than seeing it as “your money” to spend.
What is BNPL?
In short term lending, BNPL stands for ‘buy now, pay later’. Over the past few years, BNPL has surged in popularity, with 17 million people admitting to using BNPL to buy something online and 10% of people using it for this year’s Christmas shopping.
While it was initially thought of as a trend among younger consumers, the fastest growth area is now among people in their 40s and 50s.
With fewer checks and cheaper fees, BNPL can feel like an attractive option to shoppers, especially at expensive times of the year.
However, it poses a significant risk if consumers can’t keep up with repayments or start to use it for everyday essentials, rather than occasional purchases.
What are the emotional threats of credit cards, overdrafts, and BNPL?
Sadly, short-term lending can seriously impact your wellbeing, as well as your finances.
50% of people in debt have mental health problems, and 25% of people with mental health problems are in debt. The consequences of short-term lending can cause anxiety, stress, low self-esteem, and depression, as well as physical effects like headaches, sleeplessness, and a lack of concentration.
And it’s easy to see how this situation can spiral out of hand. Impulsive spending can be a symptom of depression – in fact, a quarter of people with mental health issues admit impulsively buying something unnecessary, knowing they could pay for it later. Compare this to just 14% of people without mental health problems. So, the vicious cycle continues.
Debt is a massive worry for anyone, even if you don’t experience depression or anxiety. Therefore, it impacts the emotional wellbeing of all of us, no matter how resilient and prepared we may feel.
How can I access funds quickly without using short-term credit?
Luckily, if you need money fast, you don’t have to resort to high-interest credit cards, unauthorised overdrafts, or problematic payday loans.
GMB members have their very own Credit Union which provides access to affordable, fast and flexible loans. GMBCU is a responsible lender interested in the long-term financial wellbeing of all members and we consider loan applications on an individual basis paying particular attention to affordability.
Find out more about our fast, fair, flexible member loans here.