Expensive short-term credit is damaging the nation. Between us, we owe a total of £56.4 billion in credit card debt, and a staggering 14 million of us are using costly unauthorised overdrafts.
So, what do we mean by short-term credit, and should we make use of it or avoid it?
In the first of a three-part series exposing the truth about short-term credit, we’re exploring exactly what it is and delving into its pros and cons.
What is short term credit?
Firstly, let's clarify what we mean by short-term credit.
Short-term credit is a loan you repay quickly. Many people rely on it to cover unexpected costs they experience in their everyday life, like bills or repairs.
The duration of short-term credit can vary, but it's usually less than a year. However, it can be weeks or even days, in the case of unauthorised overdrafts.
The main types of short-term credit are credit cards, overdrafts, and payday loans.
What are the advantages of short-term credit?
Short term credit does have certain positive features, for example:
• Fast access – funds are usually available same day
• Higher acceptance rates - even with poorer credit ratings
• Minimal paperwork compared to long-term loans
• Can be good for your credit rating if you pay it back quickly
• They can help you bridge the gap between pay days
What are the disadvantages of credit cards, overdrafts, and payday loans?
However, when it comes to short term credit - like credit cards, overdrafts, and payday loans - the negatives can outweigh the positives for most people.
The disadvantages of short-term credit include:
• Expensive – short term credit has higher rates so is costly to repay
• Bad habit – for many, borrowing becomes a habit and is hard to stop
• Late payment fees – if you fall behind on payments, fees quickly spiral
• Credit score – even one missed payment can damage your credit score
• Payday loans don't count as "good credit" – so, paying them back on time doesn’t boost your credit score
Sadly, most types of short-term credit are designed to exploit vulnerable people who are unable to pay it back.
The lender profits from your inability to make repayments, charging expensive late payment fees and interest.
Borrowing expensive short-term credit can quickly force you into a debt cycle, even with the best intentions.
You can soon feel trapped in this cycle if your wage only covers your overdraft or credit card repayments - or your repayments are even more than your income - driving you to borrow more.
Should you use short-term credit?
You should think carefully and examine the pros and cons before taking out short term credit. It may seem like it will solve your financial problems, but it can create bigger ones later.
For example, it would take you a staggering 24 years to pay off the full balance of an average credit card making only the minimum monthly payments.
So, it pays to carefully consider the long-term consequences of using an overdraft, credit card or entering into a short-term credit agreement.
A safer alternative to short-term credit
You may now be wondering about the alternatives to short-term credit. What options are available to you when you need support covering the cost of day-to-day life?
Fortunately, you can stay in control of your finances without turning to riskier quick fixes.
GMB Credit Union offers fast, fair, and flexible loans for members with funds available same day by faster payments.
You can apply online quickly and easily. Plus, we only charge interest on what you have left to pay, rather than the full loan amount. GMB Credit Union loans have no additional charges or fees to worry about either.
We're here to guide you through the challenges of everyday life and support you to make the right choices for you and your loved ones.
Find out more about GMB Credit Union loans and how to apply here.