How to cope with bills out of the blue when you really can’t afford it
If the last couple of years have taught us anything, it’s that even when you think life is reasonably on track, there’s always the chance of being sideswiped by the unexpected.
Two in five people have faced an unexpected bill at some point in the past 12 months, and on average it set them back almost £1,500, according to research from Hargreaves Lansdown — so there’s a reasonable chance that a shock bill is lying in wait for you.
The good news is that more than half of people had savings to cover at least some of the cost of their unexpected expenses. This is partly because almost half were able to build up a lump sum during the pandemic. However, not everyone was in a position to save, and even among those who were, two in three have been spending their way through this cash.
It means that being blindsided by a bill could be far more stressful in the coming year, and more of us will end up borrowing to cover the cost.
Right now, around a fifth have put unexpected bills on their credit card, one in 10 have dipped into their overdraft, and more than one in 10 have borrowed from family and friends.
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The use of Buy Now Pay Later deals also rocketed during the pandemic, and more than one in 14 people say they have used it for unexpected expenses.
If you can’t afford a bill out of the blue, it’s not a purchase you can put off, and you’re facing the prospect of borrowing to cover it, it’s worth thinking carefully about your options.
The first is to see whether there are any ways of spreading the cost. If, for example, you have a tax bill you’re not expecting, the "time-to-pay" arrangement will let you spread it over the next 12 months.
If you’re landed with an enormous unexpected bill from a utility provider, talk to them about the payment options.
It’s also worth knowing that if you’re being billed for energy you used over 12 months ago, the back-billing rules may mean you don’t need to pay, so check the Ofgem website to see if this applies to you.
If you need to borrow to cover the cost, consider the most cost-effective way of doing so. The rates on credit cards vary enormously, and there are still plenty of them offering 0% introductory deals, so before sticking the cost on an existing card, check if you can get a better deal.
It’s easy to dip into your overdraft accidentally, but it comes at a huge cost, with typical rates of around 40%. It’s one of the most expensive ways to borrow, so should be avoided if at all possible. It’s worth keeping an eye on your account, so you know where you stand, and can consider cheaper ways of borrowing if you absolutely have to.
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If there’s a risk you’ll dip into an overdraft, it’s essential to arrange one. Some, such as First Direct, offer a buffer, so you don’t face charges if you go slightly into the red. If you don’t have a buffer, you’ll need to set up an arranged overdraft. The interest charges are still just as ludicrously high, but you won’t end up with bounced payments and the associated fees.
Borrowing from friends and family can feel like a cost-free alternative, but you need to consider it carefully. Mixing relationships and debt is complicated, so before you borrow you need to think how it will affect your relationship, how you’ll pay any money back, and what will happen if you can’t afford any repayments. Sometimes it’s this so-called cost-free option that can end up costing you most in the long term.
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Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.