Beware monthly repayments, they're really a loan!

Ah, is it time to renew you insurance? Are you buying a new mobile phone, washing machine, TV, vehicle or any other expensive item? or perhaps you are repaying a credit card purchase? The financial experts behind these services are really helpful - they do not want you to go through any hardships with your daily dose of visual entertainment on the TV. They'll even throw in free next day delivery in most cases.

Why settle for a 40" dumb TV with a plain old HD LED screen, when you can have 58" 4K TV with built in free view, smart remote, wifi capabilities, media streaming with a propriety interface and badly designed remote (that takes forever to type anything into the badly coded web browser) and mediocre version of BBC iPlayer / YouTube apps built in - that will update for 6 months and then stop. Surely the latter is the better option?

It really isn't better at all in my opinion - a TV built with all of those features, still feels underrated compared to a TV attached to a small energy efficient PC. It has the streaming, WiFi, free view, decent keyboard, latest software updates, Google Chrome, YouTube and pretty much every feature a PC has, on a giant TV screen! Plus a small Bluetooth or wife remote with a reduced sized keyboard is plenty good for that setup.) Unfortunately, despite my proposed solution being better than the latest in Smart TV technology, both still provide access to mind numbingly stupid TV content - which we are all more than happy to consume. There appears to be no known cure to this willingness to succumb to 'reality' TV shows and other stupid content, so far - bar the removal of the TV or very strong will power, and only watching a documentaries or insightful content every now and again; The latter has served me well.

In any case, I will rant about TV content and modern media another time, in the meantime I want to make those sales sharks people the core of our discussion. In particular their suggestion of repayment over the long term. It sounds like a very helpful proposition, "the buyer cannot afford, £1000, so we let them pay this amount over 48 months". Here is the sting in the tail: "with interest".

See the image below, for car insurance

See the 3rd column? With installments? You are paying back the loan with interest and the total repayment is xxx amount - more than the figure shown in big lettering. This applies to almost any sort of repayment strategy. Buying a £1000 TV with monthly repayments, is effectively a loan for £1000 - at a very high interest rate, which you pay back. 

The same applies for a mobile contract, if you look at a SIM only deal, you can see talk time is cheap (600 minutes a month, is 10 hours of talking!), so why pay £20 to £40 a month? In reality you are paying for the handset, which when you total the length of the contract, will easily end up in the £1000's - just for owning a bit of metal/glass and plastic - which I assure you, before your contract comes to an end, is going to be a burden on you (slow, laggy, buggy, scratched/damaged) - and you will be itching for the next new phone. You could buy even the most high end handset for half of that price, and put a monthly SIM card in there, for £10 or less.
Monthly repayments really are a loan, I do not need any further examples.


So what is the solution to this predicament?

1. Do not buy crap, you will find your life is pretty complete with a smaller, less featured model of this item. (obviously car insurance or home insurance leaves us little choice). Even if you can afford crap, carefully evaluate this crap and then decide if you really need it.
2. Do not buy crap you cannot afford. Save up and then buy it outright - you might get lucky and see a price reduction/sale over the next few months and also not have to pay the interest - savings galore!
3. Talk to a human being on the phone and arrange an interest free payment option spread out over 2 or 3 months. That should reduce the sting of having to fork out £2000 or whatever in one go, and instead spread it out over 3 months with 0% interest. Not everything is automated, and speaking politely and explaining your circumstances in some cases, may help. I have done this with my car insurance for a few years now, and off course payment was made with a cashback credit card, thereby collecting a nice tidy bit of cash at the end of the year.
4. Borrow cheaply elsewhere. If it is absolutely necessary that you pay for this large expense, get a loan, overdraft, or a credit card with a lower APR than the sales person proposes. Work it out on paper and shop for cheaper lending options.


Research is key. 

In the above insurance example image, the RAC insurance is £2632 paid outright (its a lot of money to pay in one go), and it works out to be £2895 paid monthly, after all installments have been made, a difference of £263 over 12 months. That is almost £22 in interest per month. 

• Can you borrow £2600 elsewhere at a cheaper rate? (i.e. on a 0% credit card or a trustworthy friend/family member, overdraft on your bank account (my bank charges me £12 for overdrafts per month - which is cheaper than the £22 interest I would be paying)).

• Can you dip into your savings? Surely your £2600 savings are not earning you more than £22 a month? in which case it makes sense to let them earn. Otherwise use your savings to pay this cost, as it will save you £263 worth of outgoings at the end of the year - left in savings it will generate far lower. (Hint: you have to earn 10% interest to get £260 returns on £2600 - which is near impossible for average people like you and I).

I honestly believe, we sometimes pay ridiculous amounts for things we could do without, just for the sake of having something new or shiny, be it a TV or a sofa or a new phone. The novelty wears off within a few days, but the (hidden) interest payments continue for a long, long time...

Word of the Day: Egalitarian

egalitarian

ɪˌgalɪˈtɛːrɪən/

adjective

adjective: egalitarian

1. 1.

   believing in or based on the principle that all people are equal and deserve equal rights and opportunities.

   "a fairer, more egalitarian society"

noun

noun: egalitarian; plural noun: egalitarians

1. 1.

   a person who advocates or supports the principle of equality for all people.

   "he was a social and political egalitarian"

Smart Wallet Tip: The Worn Out Coin Edition

"Great investing is simple. The harder you work at it, the less money you’re likely to make." - anon

People who focus on constantly shifting their money from here to there to earn more money, in truth do not make much money and if they do, they might call it skill, but it is just luck.

Just like a coin that changes hands so often that in the process it becomes rounded and dull, moving your
money around from one investment vehicle to another open it to all sorts of risks, fees and penalties.

Great investors, diversify their money, buy when its cheap and leave it to mature and then reap the benefits. Active investors worry about the next big gain, the next dip, the latest headlines, the latest push in the market, and they lose in the long term (or maybe get the same as a passive investor, if they are lucky).

Start investing small, and diligently build up a portfolio, add to it every paycheck or at the end of every year. From the small acorn will grow a mighty oak.

Word of the Day: Equanimity

equanimity

ˌɛkwəˈnɪmɪti,iː-/

noun

noun: equanimity

1. calmness and composure, especially in a difficult situation.

   "she accepted both the good and the bad with equanimity"

1. synonyms: composure, calmness, calm, level-headedness, self-possession, self-control, even-temperedness, coolness, cool-headedness, presence of mind; 
2. antonyms: anxiety

10 Steps to Improve Your Credit Rating

At the risk of sounding like a cheesy TV commercial, I am going to ask you "Have you been refused credit?". If so, and even if you haven't, then this guide is for you. Why pay someone else to do what you should be doing anyway. Check your credit score and learn how to bring it back and keep it healthy.

Before we start, if you have been rejected for a credit application recently (credit card, bank account, insurance, mobile phone contract etc) - stop applying for more. You need to take a step back and figure out why you have been rejected. Further applications, could have a spiraling negative effect on your credit report. So follow these steps improve your rating.

Step 1 - Access and check your report

This is basic. You can't fight blind. Get access to your credit report. There are a few major credit report agencies in the UK, and most places will check with one of these:

• Experian
• Equifax
• CallCredit

It usually costs to check your report, but is relatively cheap (£10 a month, with a 30 day free trial). If your savvy, you can go through a cashback site, like TopCashBack or Quidco and get paid to take out a 30 day trial of your report.

Obviously, being a Smart-Wallet reader, you will itemise the date in your calendar/diary and cancel the free trial at no cost to you - thereby earning some cashback and effectively getting paid to check your credit history. Noddle, also offers a free credit report, which is largely the same as equifax/experian, so you can use that too.

Step 2 - You need to start somewhere

If your relatively young, and have no credit history yet. This could be a reason to get rejected. Straight out of university, if your applying for a high risk credit card, loan or car finance - the lender does not have enough information on you to give you a loan. Your an unknown risk.

Start with a basic credit card, even if its the one offered by your bank account provider (although, I would recommend either capital one or aqua - as they provide 0.5% cashback), and use it lightly for your necessary expenses, spend a few quid on it monthly and then have a direct debit clear up that expenditure. Over the next few months, your credit report will have activity, and it will show you to be a responsible borrower. 

Step 3 - Too much credit is bad

On the other end of the scale, having far too much credit can hurt you too. If you have 9 credit cards, the lender may be thinking, "what if he/she spends on them all and cannot pay off the 10th card?" - in which case you might get rejected. If you have some old credit cards, close them (don't just destroy the card, phone the lender and cancel the credit agreement). Same for store cards, but why you would get store cards in the first place, is beyond my understanding.

Step 4 - Get errors amended

If you spot any glaring mistakes in your report (late payments or incorrect address or anything that is untrue) - write/email the agency (write to as many agencies as you can), with evidence if possible and get a note put in your file. This should somewhat mitigate the issue in about 30 days.

Step 5 - Stability

If you have a permanent home address, that is synchronised accross your bank accounts, passport, driving license and credit cards - it looks like you are stable. If you have old addresses on file for some, it may look like you change homes too often or are unstable. This is a risk (i.e. risk of fleeing without payment) and might get you rejected. Keep your details up to date. Check with your credit cards and loans, banks, driving license, and so on.

Other things that help are home ownership as opposed to renting or living with parents (harder to flee, if you have a £150k brick and mortar investment) and a landline number on your applications as opposed to a mobile (provide both if you can).

Step 6 - Register to vote

On the same note, get yourself on the electoral register - this is your primary source of proof of address. Check with your local council office for details on how to do so, if you are not already registered.

Step 7 - Space and time

Too many applications in too short a space of time, is trouble. It makes you look desperate for credit, which brings into question your motives. "Why do you need 5 credit card applications in 3 months? How will you use them and how will you pay them back?" - its a recipe for rejection. Multiple rejections in a short space of time look bad too. "It begs the question, why are you getting rejected so much?" Apply once, then give it a few months. Most credit lenders agree that 6 months should be sufficient.

Step 8 - Time and money

Late payments are bad. Defaults are worse. Do not do it.
Rule of thumb for credit cards is to use them as a debit card. Use them for benefits (cashback/voucher/etc), then pay off with a direct debit set to clear the whole bill at the end of the month. Do not spend money you do not have. £5 late now, could be all the difference to that loan application 3 years later.

Step 9 -  One for all, all for one.

This will not apply to everyone, but joint financial accounts/loans etc tie you in with the other persons credit report. If you have an ex, or a partner whom you no longer associate with, check that you no longer have any accounts open that link you together. If the other person defaults, it affects you.

Step 10 - Check, then recheck

Using a service like noddle means you do not need to pay to check your credit history (or most of it), so check once every year at least and ensure nothing new has occurred that makes you look bad. If something has gone wrong, for example, a default due to circumstances beyond your control, your best recourse, is to continue to be a good borrower, and over time your report will heal.

That's it for now. It's not difficult, but by abiding to simple rules like these, you can be a better borrower and open doors to bigger and better financial tools for yourself in the future.

Word of the Day: Provision

provision

prəˈvɪʒ(ə)n/

noun

1. 1.

   the action of providing or supplying something for use.

   "new contracts for the provision of services"

   synonyms:

   supplying, supply, providing, purveying, delivery, furnishing, equipping,giving, donation, allocation, distribution, presentation "the President condemned the provision of weapons to guerrillas"
2. 2.

   an amount or thing supplied or provided.

   "changing levels of transport provision"

   synonyms: facilities, services, amenities, resource(s), equipment, arrangements,solutions; 

   
   

   • 
     

verb

1. 1.

   supply with food, drink, or equipment, especially for a journey.

   "civilian contractors were responsible for provisioning these armies"
2. 2.

   set aside an amount in an organization's accounts for a known liability.

   "financial institutions have to provision against loan losses"

When is it ok to use my savings to clear debt?

Is it OK for me to stop saving and pay off my debt?

That is a question that I see being asked quite a lot around forums and blogs about money. So to clarify the situation, the answer, here at the Smart Wallet HQ is an unequivocal and absolute YES. Get rid of any savings and pay off your debts. Go. Do it now, I'll wait until you return.

I can say this with certainty, because you stand to save more by doing this. Stop right there, first I'm told that saving is the key to good finances, and now that I have some savings you want me to stop saving and use it? Yes. Debts cost more than savings, clear it off and your finances are better off.

Lets get some things cleared. A credit is a positive addition to your net worth, like when my business pays me at the end of the month. I now have a net credit worthiness of say £2000, which means that I am now worth £2000 more than I was, 24 hours earlier.

A debt is the opposite of credit, in fact it is negative credit. If I have a debt of £1000, I am now worth £1000 less, because sooner or later, I will have to pay that money back. It is easy to calculate your net worth this way. Just add up all of your positive credits (house, car, laptop, jewelry) and then subtract all of your negative credits (credit card balances, loans, mortgages). Your OK when the sum is positive, but when it is not, then you need to start rethinking your finances.

The problem compounds because of, well... compound interest. Your £1000 negative credit can easily spiral to several times that. (Assuming a 35% APR on a credit card balance of £1000, after 1 month it will be £1029, after 2 months £1159, and after 12 months £1411).

And to add to our woes, the credit lenders are like casinos, the house always win. The debt interest rate will always beat any savings rate they provide. So if you borrow £1000, and put it into a savings account - you will lose. The savings will be paltry, compared to what you have to pay back in interest.

Ok, lets crunch some numbers. Lets assume you have a debt of £10000, with a modest 15% APR. This could be a car on finance or a personal unsecured loan. And lets say you have savings of £5000 earning 5% interest (yeah, right - that's not very easy to get, most banks pay you peanuts on your savings).

So your net worth is £5000 (without calculating for next months salary), and assuming no extra income/outgoings, your net worth is going to be as shown in the table below.

The only winning move is not to play.

	-ve Credits	+ve Credits	Total
Current Month	-10,000	+5,000	-5,000
Month 2	-10,125	+5,020	-5,105
Month 3	-10,251	+5,041	-5,210
Month 4	-10,379	+5,062	-5,317

As you can see it is a fools game. You cannot win. Your savings will never outweigh your debts. And your net worth is spiraling further and further into the negative.

Now assuming that you use your savings to pay off the debt, here is another simulation:

	-ve Credits	+ve Credits	Total
Current Month	-10,000	+5,000	-5,000
Month 2	-5,062	+0	-5,062
Month 3	-5,125	+0	-5,125
Month 4	-5,189	+0	-5,189

There is some light at the end of the tunnel, your net worth is a lot better in this scenario than in the previous one. Just after 4 months, your £128 better off than if you left your money in savings. 

So, there you have it. While my theoretical simulations above may not represent your current financial circumstances accurately, it should give you a base for doing your own napkin calculations (if your inclined that way, I would recommend a good free spreadsheet, like google docs). Your always guaranteed to save more for your future self by paying down debts now.

There are specific cases, like my pre-2012 student loan, that incurs 0.0145% interest, which is beaten by my 0.018% savings in my emergency fund.

There are certain factors to take into account, the first and foremost is to pay off the most expensive debt first. This will be payday loans (why you have those is beyond me!), store cards (again, why?!), credit cards (a bit better, but still shop around for good deals, and money making schemes), as opposed to the mortgage, or a student load or a cheap personal loan - which provide 'cheaper' interest rates.

Consideration should also be given to a consolidation of loans. This will generally require speaking to someone face to face or over the phone, but it might help to reduce your costs and repayments (and credit score) by having to make a single repayment instead of 3 or more per month. You might also be able to use credit cards to your advantage, by shifting the balances of several cards to a long 0% deal. Sometimes, just asking politely, you might get a reduction of the rates on your debts too.

Thirdly, look out for the small print. Common sense would dictate, that a lender would be happy to accept early repayment, as they are getting their money back and can use it elsewhere. But no, despite the fancy 3 piece suit your banker wears, he only does it to hide his dorsal fins and other shark like traits. There are a whole host of fees and penalties that a lender can charge you for early repayment. And in some cases, this might be the same as the interest they expect you to incur over the loan term, so you might be better off in that scenario, saving your money and slugging off the repayments as expected. Some mortgages, do allow a small percentage of penalty free over payment per year - if you can do that, do it.

Finally, don't forget to keep an accessible liquid emergency cash fund. Life can throw anything at you at anytime, from a burst drainage pipe to a broken boiler. It makes sense to pay off expensive loans/debts and should you need emergency cash, you can reborrow on a credit card and pay off the card within 30 days - but if getting a credit card is difficult or the rates are horrendous or you need the cash for longer than the 30 days interest free period, an emergency cash fund is important. For example, a cheap mortgage might mean you can use all your savings to overpay, but keep £1000 for emergencies. Or you might choose to spend all your savings overpaying the mortgage, knowing that you have a few thousand £ limit on a credit card. But should you have a 35% APR credit card loan, throw all your savings at that, and you can always reborrow from the card later should you need to. This will vary based on your circumstances, so will require some thought on your part.

That concludes my thoughts on debts vs savings. I hope that this piece encourages you to think about where your money will make the most impact (paying off debts), and hopefully it saves you some money in the long run too. Adios.