More than half of people in the UK are living beyond their means. Research at the end of last year found that on average we overspend by £150 a month. There are a host of reasons behind this, but what many of us don't realise is that even before the level of debt we are building up starts to become a problem, we have caused serious damage to our credit rating.
So just how serious is the problem?
Why?Overspending is often perfectly understandable. Many of us are living on smaller salaries than before the credit crunch, as we lost our jobs and took a lower-paid role, or we accepted fewer hours in an effort to keep our jobs. It can take a while to adjust our lifestyle to match our reduced income, because things like rent and mortgages can't be changed overnight.
There are those of us on fluctuating incomes too, which may be the result of being paid a large proportion of our wages in commission, being on zero-hours contacts, or working for ourselves. It's not easy to match these sorts of incomes to regular outgoings without occasional mistakes.
Even those on the same salary are struggling, as wage inflation has not kept pace with how fast prices are rising, so those things which were once affordable are now out of reach. It can take a while to realise this and adjust to it, and in the meantime debts start building.
It can also have a particularly detrimental impact on our credit reports - which can make borrowing in future much more expensive.
Credit ratingThere is no one universal credit score. Instead you have a credit report which collects information on all your debts, overdrafts, loans, credit cards and payment history. The banks will use this to put together their own score depending on their priorities. However, there are some things that banks typically score borrowers poorly on, and a number of them are side-effects of overspending.
Early problemsThe first time your tendency to overspend may show up on your credit report is where you use up all the credit you have available. Your credit report will show how much capacity to borrow you have left. Banks will often score a borrower better if they have plenty of wriggle room left, and as they use it up, their score will fall.
If you decide the best way to solve the problem is to apply for a credit card with higher limit, your credit rating will fall again, as you have taken on a new credit account.
Then over time, as your total debts grow, you will be seen as a less attractive customer, because the banks may be concerned that you cannot afford to repay what you owe.
If you make all the minimum repayments on all your debts, you may think that you are fine. However, the fact that you never pay more than the minimum will appear on your report, and some lenders will be less willing to lend to you.
Likewise if you take a payday loan to tide you over, it will show up, and will put some lenders off.
So even before you miss a single payment of any kind, you have damaged your credit report.
Major problemsAs your level of debt starts to grow, a number of things are likely to happen which will hit your credit report.
If your debt gets so large that you start to miss payments, you will do the most damage of all, because late or missed payments will be recorded, and lenders are likely to mark you down heavily for this.
There are other things which will show up. So, for example, if you fail to pay your rent or utility bills on time because you've run out of money, it will show on your report.
If you have a number of issues on your credit report, you may struggle to borrow more when you run out of credit, and you may end up paying a higher interest rate on those cards you can get your hands on. This means more of your income goes on interest payments, so your monthly shortfall grows.
What can you do?The solution depends on how far down the track you are. You should start by getting hold of your credit report from an organisation like Experian, which will show you where you stand.
If you have only been overspending for a short while, and don't have too much debt, you should put a budget in place, stick to it rigidly, and aim to pay off the debt as soon as possible. If you are paying a very high rate of interest it's worth switching to a lower rate, or even a card with an interest-free period.
If your problems are more serious, then you will need a root and branch review of your finances, to see how you got into this position, and how to get yourself out of it.
If budgeting will allow you to meet all your debt repayment obligations and keep you within your means, then this may be all you need to do.
However, if things have gone too far, you may need to consider some sort of debt solution. These can range from debt management plans to IVAs and even bankruptcy. All of this will harm your credit report, but if your problems are really so serious you don't have any other choice: trying to borrow more to delay the inevitable will simply mean that when you hit a brick wall you'll be carrying even more debt.