Life Without a Financial Safety Net Isn’t for the Faint of Heart

For people on a tight budget with little or no financial safety net, a single misstep such as a late loan or utility payment, which might be only a minor glitch to a person of means, can be the trigger that sets in motion a problem lasting for months or even years. A case in point is the effect that the transition to universal credit (UC) has had thus far on some claimants, whose struggle to cover short-term losses is having long-term consequences. The changeover has driven many people into debt.

UC is the government’s much-criticised flagship welfare reform programme that rolls six benefit payments, which traditionally were paid weekly or fortnightly, into one monthly lump sum. The idea behind the new scheme is to encourage personal budgeting while improving incentives to work, and – theoretically at least – respond flexibly to the transition into work. But that transition has been anything but smooth for claimants who have to wait five or six weeks –or more – for the initial payment.

It may have sounded good on paper, but…

 

The UC scheme was actually introduced on a limited basis in 2013, with the idea of eventually extending it to all new claimants of jobseeker’s allowance, employment and support allowance, income support, housing benefit, working tax credit, and child tax credit. As of early February 2016, the expected end date for moving all benefits claimants onto the system is March 2021. That of course is subject to change. In any case the programme is already fraught with problems, not the least of which is that for claimants who have to wait several weeks for their first payment under the new system – and have no other income – a short-term crisis can be the beginning of a long-term spiral into debt.

A single mum whose story was told in the Guardian had been carefully budgeting her benefits and just barely getting by. But during her transition to UC, whilst waiting for her initial payment, everything fell apart. The heating shut off, the electricity failed, her phone credit ran out, and she had to utilise a local food bank. As if she didn’t have enough problems, her local Jobcentre plus insisted that as a condition of the new UC, she spend 25 hours each week looking for work or risk sanctions. At that point, however, she couldn’t even afford the bus fare needed to hand out her CV to local restaurants.

The chief executive of the woman’s local (Tameside) Citizens Advice Bureau, Nigel Morgan, says that the expansion of UC in the area has caused an increase in rent arrears and other forms of debt. “People are borrowing money to cover short-term losses and then struggling to pay it back,” he says. “And, anecdotally, loan sharks are hitting the most vulnerable people.”

It isn’t just the claimants who suffer for months or years; social landlords and housing associations are also burdened. Chloe Fletcher, policy director at the National Federation of Almos (NFA), says that the financial stress created by these arrears could mean cuts to new building plans as well as repair and maintenance services and tenant support work.

The UC crisis highlights a larger problem not unique to welfare recipients: it can be incredibly expensive to be poor.

Don’t dig yourself in any deeper than necessary

 

Regardless of whether one is a UC claimant, the lack of a safety net such as savings or investments (or at the very least a comfortable salary) places a person at a level of struggle that may seem alien to those who take their own safety nets for granted. For the more fortunate among us, minor money problems are easily addressed. If we run out of cash before the next payday but need to buy something, we put the purchase on a credit card without giving it a second thought. If we have an unexpected expense and are temporarily out of cash or credit, we dip into our savings. If we’re late on a payment we shrug, pay the late fee, and go on about our lives.

But these aren’t options for those who have no savings and poor credit.

If you’re one of those folks without a safety net you do still have choices. Your spotty credit record will generally prevent you from getting a large loan or the best interest rates, but a smaller short-term loan may be within your reach. Many of these lenders do not require a credit check, so that is one less concern you will have.

You’ll pay for the convenience with higher interest rates because you’re considered more of a risk, and if you allow the loan to “roll over” past the term, you will pay even more interest. That’s why it’s important to carefully evaluate your situation and only borrow if you’re sure you can pay the loan back on time. Don’t dig yourself any more deeply into the debt hole than is absolutely necessary.

There’s always a way out

 

If you’re struggling with a short-term crisis that has turned into a long-term problem, help is available. You should, of course, contact your creditors, banker, and landlord or mortgage holder at the first sign that you might be facing difficulties. If you are unable to reach a mutually satisfactory agreement with those to whom you owe money, there are debt charities available whose sole function is to help people like yourself find ways to work themselves out of what might feel like a financial abyss.

Once you finally get out of your debt crisis, do your best to manage your resources and build a safety net. You may never get to the point where money is no object, but at least you’ll be better able to handle the occasional emergency or other unplanned expense without it morphing into something that haunts you into perpetuity.

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