Tony Byrne’s View 7 August 2017

Aug 7, 2017 | Wealth & Tax Blog

The Bank of England has recently been reported in the Sunday Times to be demanding detailed information from High Street lenders on how they approve loans after sounding the alarm over the growth in consumer debt. In particular the introductory 0% rate on credit cards and the maximum size of personal loans are of concern.

The amount borrowed on personal loans, credit cards and car loans has risen by 10% over the last year while salaries have risen just 1.5%. The amount of disposable income put away into savings has fallen to a record low of 1.7%.

The FCA in the meantime estimates that 3.3 million people are stuck in permanent credit card debt robbing Peter to pay Paul to stay afloat financially.

Worries over the credit boom come ahead of the start of the 10th anniversary of the global financial crisis.

Whilst it is always sad to see anybody struggle financially I do wonder just how many of the 3.3 million people are truly stuck in credit card debt and how many are simply using the 0% interest facility strategically.

Not many of our clients have any debts but we do have some who simply take advantage of interest free finance to buy furniture and cars in particular. Some of them use 0% interest credit cards too. These clients could easily afford to buy these items for cash but they prefer the interest free credit so that their spare cash remains invested and working for them. Bearing in mind that the average investment return our clients have achieved is 9.8% a year over the last 21 years using our Wealth Investment Strategy who can blame them?

I have long held the view that debt is not a bad thing as long as it is totally manageable. You have to have a plan to pay off your debt that you know is foolproof and safe. Let’s face it, the majority of people in the UK use debt to buy what is likely to be the main lifetime asset of their estate – the family home.

Credit cards when managed properly can be very useful to the smart individual. Let me list some of the benefits of credit cards currently.

  1. 0% interest on balance transfers for periods of up to 33 months.
  2. 0% interest on money transfer with a few lenders for up to 41 months.
  3. Free insurance protection on purchases.
  4. Rewards points or cash back.
  5. 4-7 weeks interest free credit.
  6. Improved credit record for using credit regularly.
  7. Monthly detailed statement of your spending.

Some people are even using interest free credit cards to pay deposits on house purchases and/or home improvements! I came across one case where a lady borrowed money on a credit card interest free to buy a low cost house in Newcastle! She borrowed the money, developed and improved the property, let out the 3 rooms to individual tenants and then re-mortgaged it to pay off the credit card debt before interest could to be applied. The property provided her with net income of over £400 a month and she did not have to spend a penny of her own money! Amazing eh?

Now I know that is an extreme example but nonetheless it does prove my point that credit cards like any financial instrument, can be very useful as long as you are smart with your use of them.

Any downsides? Well the obvious one is not having a workable plan to pay off your credit card debt. The other thing to bear in mind is that even if you have an impeccable credit record, the credit reference agencies are likely to downgrade you if you apply for, and borrow, too much money on credit cards over a short period and do not pay off your debts quickly enough even if the debt is interest free and totally manageable by you! Bizarre but true. The reason for this? The credit reference agencies all use automated credit scoring systems. Also credit reference agencies only record your debts not your assets.

So to summarise, borrowing money on credit cards is smart as long as you manage your debts sensibly and soundly.