Credit cards are a handy way of buying goods and services, and then paying for them at a later date (either in full or by monthly payment). But how do they work, can you use them effectively, and is paying off the minimum amount each month really such a bad idea?

Making a purchase with a credit card

When you buy something with your credit card, you are given a certain amount of time to repay that purchase in full (after you’ve been paid, for example) without any interest being applied to that particular purchase.

But after this interest-free period has elapsed, your credit card company will charge you a set interest rate that is usually applied on a daily basis until your total credit balance has been repaid.

In the meantime, you must make at least a minimum specified repayment each month until the entire credit card balance is clear.

This means that a credit card can be used to buy goods and services on an interest-free credit basis, but only if you repay that purchase in full before interest is applied to it.

Easy credit?

Credit cards are notoriously easy to obtain, although associated interest rates vary hugely depending on your credit status.

At the time of writing, a Google search for “credit card APR” revealed a long list of different credit cards ranging from a standard Barclaycard offering credit purchases at a representative APR of 18.9% whereas an Aqua credit card representative APR is 39.9%.

Compare these with bank loan APR rates that you might be able to get from around the 5% mark, and you can see that credit cards offer a relatively expensive form of credit.

But of course once you have a credit card you don’t have to apply to make each purchase like you have to apply for each bank loan. You just take your purchase to the till, tap in your PIN number, and a credit transaction is made.

It’s easy credit, but like many forms of easy credit you’re charged more in interest for that convenience.

This means you have to take responsibility for using your credit card with care because, after your purchase’s initial credit-free period, you’ll be charged a significant amount of interest on that credit purchase thereafter.

And one thing you definitely don’t want to do is get yourself in a situation whereby all you can afford to pay back each month is the minimum monthly repayment on your credit card balance.

Here’s why…

Why you shouldn’t pay only the minimum balance

With pretty much all credit cards, if you have a credit balance at the end of a month, you can choose the amount you wish to repay but this amount must be more than a minimum amount as specified in the card’s terms and conditions.

Sometimes a minimum payment may be set at whichever is the greater figure of, say, 2.25% of whatever your balance is or £5. In this case if your balance was £1,000 then you could repay any amount between the minimum 2.25% and the full balance (between £22.50 and £1,000).

This may seem very convenient, but you need to consider the interest charges that are made on a daily basis and then totalled in each monthly bill.

So for example, if you bought an item for £1,000 with your credit card which has a fairly typical APR of 20%, and you repaid £100 per month then you’d pay a total of around £92 in interest and it would take you 11 months to clear the balance at this rate*.

However, if you were to repay only the minimum repayment amount each month (which for argument’s sake is the highest figure out of 1% of the balance plus interest, 2.25%, or £5) then do you know how long it would take to repay your £1,000 purchase?

A breathtaking 18 years and 7 months!

And you’d pay a total of £1,337 just in interest over that time, as well as the original £1,000!

If you’d like to see how this was worked out then Martin Lewis has a great credit card minimum repayment calculator on the MoneySavingExpert website so you can tap in your own credit card balance and see how long it would take to pay your balance off at the minimum rate.

*You should note that these results might not be exact, but they do illustrate how much more you could pay (and for how much longer) if you only repaid the minimum amount required by your credit card terms and conditions.

In summary

Credit cards are relatively easy to obtain and they’re a convenient way of buying goods and services (on an interest-free credit basis if you can settle your bill in full before interest is applied).

But it’s important to take responsibility for how you use your credit card, and try to pay off your balance quickly to avoid a significant amount of interest being applied. And you should definitely try and avoid making only the minimum payment each month, because this will severely affect your ability to clear your credit card balance.

The post Credit cards explained appeared first on Debt Help Scotland.

With all the mainstream news coverage on the topic, you may already have heard about payment protection insurance (also known as PPI) and the numerous PPI claims that have been made through insurance being mis-sold to people who weren’t actually eligible for the insurance in the first place.

The amount of money put aside to compensate customers who were mis-sold by the big PPI sellers is almost £14bn and the Financial Ombudsman estimates that they will resolve around 245,000 cases this year – three times as many as they closed in 2012.

Here’s how to make a PPI claim if you think you might have been mis-sold.

Step 1: What is the reason you feel you were mis-sold PPI?

If you’ve taken out PPI and want to complain about mis-selling, there must be a reason why you feel you were mis-sold. Here are some common reasons for a complaint against a PPI seller.

Step 2: Check you have a valid claim

The tricky part of PPI claims is actually proving that you have been mis-sold. Paperwork from old loans, credit cards and other agreements are often lost or missing so it can sometimes be difficult to track down and get paper evidence to send to the seller.

If you still have an open credit account with your PPI provider then they are obliged by the Consumer Credit Act to supply you with the Terms & Conditions for your PPI agreement. Whilst most will provide this for free, they are able to charge a nominal £1 fee. You might want to include a cheque payable to the value of £1 if you decide to contact them to avoid wasting time with back and forth post.

If, however, your account is closed and dates back a few years your provider might not supply your T’s & C’s. In this instance you might need to submit a Data Protection Act Subject Access Request instead. It costs £10 to do but will get you the information you are requesting from your lender.

Step 3: Make your claim

At this point you can choose one of two options.

1. Write to your lender yourself to make your complaint and explain your case. Or;
2. Use a PPI claim service who handle the entire process for you (for a fee).

Making your own PPI claim

The benefit of submitting your own complaint and trying to reclaim yourself is that the only cost associated is time. This process can be quite stressful though and your lender could make it more lengthy and difficult by refusing your claim. If you want to handle your own case, here are some points to consider:

• Use the free templates and questionnaires from the Financial Ombudsman to fully document your case.
• Check your lenders website for more information on PPI claims. Many big lenders have specifics on their claim process.
• Take your case to the Financial Ombudsman if your lender refuses your PPI claim. (Details on complaints to the Ombudsman here).
• Don’t give up! It can be a lengthy and time-consuming process but if you genuinely have been mis-sold then re-submitting your claim and complaining to the Ombudsman is the way to go.

If you want the convenience of not having to manage your own claim, simply don’t want to do it yourself, or you’ve had multiple rejections, then you might want to consider using a company to make the PPI claim on your behalf.

Whichever option you choose, if you feel that you have been mis-sold PPI on a loan, credit card or mortgage then you are able to try and reclaim what you’ve paid. Good luck!

The post A Guide to Making PPI Claims appeared first on Debt Help Scotland.

If you’re sensible and manage your payments well, a loan can be a reasonable way of making an essential purchase.

But how do you know how much you can borrow? And what can you get loans for? And what types of loans are available?

How much can you borrow?

A better way of looking at this is; how much can you afford to repay?

We all know that a loan must be paid back, and if we take out a loan and then find that we’re unable to afford the repayments then our creditor may instigate legal action against us.

So it doesn’t make sense to take out a loan if you can’t afford to make the monthly repayment.

Look carefully at your income and expenditure to see how much of a loan repayment you can comfortably afford to make. Don’t forget that if you were unfortunate enough to lose your job, or have some unexpected expense to pay, then you’d still be legally bound to make your loan repayment on time.

What happens if you can’t repay a loan?

If you miss a payment, your creditor is likely to send you a Default Notice to formally recognise that you’ve missed a payment. This Default Notice is likely to be recorded on your credit file.

Once a creditor has issued a Default Notice, they may then take legal action against you to recover the money owed if you can’t come to a mutual repayment agreement.

If this were to happen, they might then issue a County Court Judgement (CCJ), which is a legal demand to for you to repay their money at a rate usually decided by the court. If you can’t settle the debt in full within one month, then a CCJ remains on your credit file for six years.

If you default on your CCJ repayments, then it’s possible that (subject to a few restrictions) a creditor may apply for your bankruptcy.

What can you get a loan for?

In principle, a loan can be taken out in order to pay for anything, however most reputable lenders would want to know why you’re applying for the loan in the first place as they’d want to be sure that you weren’t wasting the money or doing something illegal with it.

Payday loan companies, for example, aren’t likely to ask too many questions, but these types of loans may penalise you heavily if you default on them and so for this reason alone they should be avoided if possible.

What’s the difference between a secured loan and an unsecured loan?

A secured loan is a loan made to you that stipulates that if you were to break the repayment terms of the credit agreement, then the creditor may enforce the sale of an asset in order to settle the debt.

A secured loan is most often secured against your home, as this is an asset that is usually valuable enough to sell in order to raise the money to pay off the debt if things were to go that far.

An unsecured loan is a loan that isn’t secured against an asset. So if you were to default on an unsecured loan, your creditor wouldn’t be able to force you to sell anything in order to recoup the debt. With more perceived risk from the lenders point of view, unsecured loan interest rates can be significantly higher than secured loan interest rates.

Unsecured debts can also be made into secured debts via a Charging Order through the courts.

Is a mortgage a secured loan?

It is.

A mortgage is effectively a long-term secured loan which is usually offered at a relatively low interest rate that is used to buy a property to live in or let out.

There are several kinds of mortgages, but most require you to pay a cash deposit for the property and then repay the sum loaned to you over a long period of time; 25 years is typical.

The interest rate you are charged can differ depending on the product, and this may be variable, fixed for a certain time, or tracked to a base rate for a certain time.

Do you need a loan?

You might need a loan if you need to make an essential purchase that you a) can’t afford to pay cash for, and b) can’t wait to save up for.

Before applying for a loan, you need to make sure that you can afford the repayments. You might want to consider how you would meet your repayments if you had some unexpected event that caused your income to decrease (such as job loss) or your expenditure to increase (such as an unforeseen major car repair).

Consider also that you will repay more than you borrow, because of the interest charged. And all things being equal, the longer you take to repay your loan, the more money you’ll repay in total.

Reputable loan companies will make sure you understand all these implications before you sign your credit agreement.

The post Do I Need a Loan? appeared first on Debt Help Scotland.

Teaching your children the value of money, and the benefits of saving money, is a life skill that you know will pay off in the long run.

But can kids have bank accounts? Do they have to pay tax on interest like adults usually do? How does a Junior Cash ISA differ from the normal cash ISA? And are there tax-free ways of saving?

Children and bank accounts

There’s no legislation that prohibit babies or children owning a bank account, although different banks offer varying accounts, each with their own eligibility rules and regulations.

So a minor may have a bank account, but most banks would require them to have a parent or guardian as a signatory. This would mean that the signatory must approve a deposit or a withdrawal.

Tax on interest

Unless you have a bank or savings account that doesn’t apply income tax to interest received, as an adult you would normally expect to pay income tax on the interest you earn.

However the tax rules for children who receive bank deposits as a cash gift from a parent is slightly different.

For children who receive their money from a parent (rather than personally earning it) tax is only applied to their interest if their interest is £100 or more. And then income tax is applied to the whole amount of interest earned, not just the interest over £100.

If the level of gifting made by you to your child’s bank account means that they’ll earn more in interest than £100 per year, and you wish to avoid the resulting tax payment, then there are three other main types of saving for children that won’t ever incur a tax payment…

Junior Cash ISA

As with a normal cash ISA, this type of savings account allows a child to pay in up to a certain amount (currently £3,720 for a Junior ISA) each tax year and never pay tax on the interest earned.

However there are a couple of major restrictions.

Firstly, once the money is in a Junior ISA it can’t be withdrawn until the child reaches the age of 18. So you must be sure that you (as a family) can afford to lock the money up.

Secondly, the government brought in a type of saving called a Child Trust Fund for all children born between 1st September 2002 and 2nd January 2011. If your child was born within this time period then they will have a Child Trust Fund to pay into rather than Junior ISA.

Child Trust Fund

A Child Trust Fund (like a Junior ISA) allows a saving of up to £3,720 per year (child’s birthday to child’s birthday) to be made, with interest earned on a tax-free basis.

As with the Junior ISA, money deposited in a Child Trust Fund cannot be withdrawn until the child reaches the age of 18.

Children’s Bonds

These are government bonds that can be bought for a child by a parent, guardian or grandparent and which then earn a fixed amount of interest each year for five years that is tax-free.

If you buy Children’s Bonds, the minimum investment you must make each time is £25, with a maximum amount that can be held for each child being £3,000.

The money invested can be withdrawn at any time, but a penalty that equates to three months’ interest will be charged for doing this.

Premium Bonds

These are government bonds that are entered into a random monthly draw, with each and every premium bond having an equal chance of winning one of tens of thousands of prizes ranging from £25 to £1,000,000.

As a parent or grandparent, you may purchase any amount of premium bonds for a child, although minimum investment each time is £100 and nobody can own more than £30,000-worth of premium bonds.

If you’re a grandparent, the premium bonds you buy for the child are actually legally looked after by the nominated parent or guardian of that child.

When the child reaches the age of 16, ownership of the premium bonds transfers automatically from nominated parent/guardian to child.

The post A Guide to Children’s Savings Accounts appeared first on Debt Help Scotland.

On the 1st of November 2012, the Scottish Government published a report detailing their plans to reform the bankruptcy legislation. In their own words, the aim is to “ensure that it is fit for the 21st century“.

Accountant in Bankruptcy (Scotland’s Insolvency Service) expect to lay the bill before the Government just before their summer recess – which is the 29th of June 2013.

It’s not possible for AiB to say exactly when this reform will come into force, but they expect it to be sometime in 2014.

So what does this mean for you as a Scottish resident?

Well it might have a big impact on your debt, how you pay it back and which debt solution is best for you.

What are the bankruptcy changes being proposed?

The significant changes appear to be happening with trust deeds which, in certain cases, may allow you to have up to 75% of your debt written off. Some of the suggested changes:

• A minimum debt level of £5,000. Currently there is no lower limit to qualify for a trust deed and this change might well make you ineligible for choose trust deeds to get out of debt.
• A requirement to demonstrate that a trust deed is the most appropriate solution. If the AiB aren’t satisfied that a trust deed is the right solution for the case, they can prevent the trust deed from gaining “Protected” status. Without this status, your creditors are not obliged to freeze interest and charges and could take court action against you.
• A minimum trust deed term of 4 years. The proposal will also look to increase the length of a trust deed from the typical 3 years to a minimum of 4. This means you will be in debt for longer and it might mean another debt solution is more appropriate for you.

In addition to the trust deed proposals, there are changes being proposed to Scottish bankruptcy (also known as sequestration).

• Simplified criteria to be eligible for bankruptcy. Proposed changes to the debtor application process would simply the Apparent Insolvency criteria and might make sequestration a viable alternative to trust deeds.
• A minimum debt level of £3,000. As with the trust deeds, a minimum debt level is proposed before you can be eligible for bankruptcy.
• Extending the repayment to 4 years. In an attempt to standardise the contribution period, bankruptcy will also be repaid over 48 monthly payments under the new proposal.
• Speeding up the bankruptcy process. The bill also has provisions to streamline the bankruptcy process which will reduce the associated costs and speed up the processing time.

The proposal also includes streamlined procedures which will make it possible for your agreed contributions to be taken directly from your salaries and wage.

The post How The Scottish Bankruptcy Reform Might Affect Your Debt appeared first on Debt Help Scotland.