Clare Francis, Site Editor
The Confederation of British Industry (CBI) has said we are facing a financial crisis on a scale not experienced in recent times and a growing number of economists warn that a full-blown recession could be on the cards. Consumers therefore need to position their finances so that they can weather the storm...
The boom time is well and truly over and some economists are warning that the economic slowdown could turn into a full scale recession.
Before you start panicking, a recession is not a certainty. In fact the majority of analysts believe it can still be avoided although the risks of an economic slump are greater than they were a few months ago.
The CBI has downgraded its economic growth forecast for the year from 1.8% to 1.7% and the Centre for Economic and Business Research, has warned that up to 10,000 jobs could be lost in the City. This is significantly higher than the 1,500 job losses it was predicting in January and underlines the fact that conditions are still deteriorating. Consumers therefore need to take action and ensure that their finances are in order should the worst happen.
Pay down your debts
If you owe money on credit cards and loans look to pay off as much as you can to cut your outgoings to a minimum.
If you can't afford to clear your debt completely make sure you are not paying more interest than you need. Because of the credit crunch, institutions are more choosey about who they will lend to and loan rates in particular, have risen over recent months. However, there are still some good deals available.
Virgin's credit card has a 15-month interest free period on balance transfers, although you will be charged a 2.9% transfer fee which will be added to the balance. The Barclaycard Platinum has a 0% offer on balance transfers which lasts for 14 months, while a number of other providers including Royal Bank of Scotland, Tesco and Abbey have 13-month deals and MBNA, Egg and Mint have interest free balance transfer offers which last until May 1 2009.
If you owe a large amount, a personal loan may be a better option. Rates for someone looking to borrow £5,000 over three years, start at 6.8% from Barclaycard or 6.9% with yourpersonalloan.co.uk.
You may be able to get a lower rate on a secured loan. The leading rate is 6.6% and this is an exclusive deal from Firstplus, available only through moneysupermarket.com. However, the debt is secured against your house, so this type of loan may not be the best option if you could run into severe financial difficulties were you to lose your job. If you found yourself unable to keep up with your monthly payments, you could be at risk of losing your home.
The best credit card and loan deals are only available to those with good credit scores. If you're unsure about your credit rating use the loans and credit cards Smart Search tools to compare deals based on your profile. Applications for credit have a negative impact on your credit score, so try to avoid applying for deals you have no chance of getting.
Maximise your savings
It is worth trying to build up your savings so you have a financial cushion just in case you lose your job.
As a general rule of thumb, advisers recommend having the equivalent of three months' salary in an easy access account although you may decide you need more or less, depending on how hard you think it would be to find another job and what proportion of your monthly income is taken up on essential bills.
The good news is, that while borrowers are facing higher loan rates because of the credit crunch, savers are being offered some of the best savings rates for years.
Kaupthing Edge has the leading instant access account without an introductory bonus at 6.50% - 1.25 percentage points above the 5.25% Bank rate. The minimum deposit on this account is £1,000 and there are no withdrawal restrictions. Alternatively, ICICI Bank's Hisave account and Bradford & Bingley's Internet Saver 2 are worth considering. They pay 6.16% and 6.15% respectively on balances above £1 and like Kaupthing Edge, don't impose restrictions on withdrawals.
Protect your income
It may be worth considering payment protection insurance (PPI), which is also known as accident, sickness and unemployment (ASU) cover.
PPI has received a lot of bad press over the last few years because of concerns over mis-selling. It is often sold by credit card and loan providers, yet this tends to be the most expensive way of buying it. An investigation by the Financial Services Authority, the City regulator, has uncovered many instances of consumers having been sold unsuitable cover or policies they would not be eligible to make a claim on.
You therefore need to scrutinise the small print when comparing income protection policies. Many do not cover the self-employed, policies also vary on when they start paying out - some will pay out after 30 days, while others do not start paying out until you have been unable to work for 90 or even 180 days.
Income protection does not cover your entire monthly salary - monthly payouts are capped although the maximum payout varies depending on the provider. For example, Paymentcare pays out up to £1,000 a month or 50% of your gross salary, whichever is greater, while the Post Office offers cover of up to £2,500 a month or 60% of gross salary.
It is important to take all of these factors into consideration when comparing deals as this type of insurance is not something that should be bought on price alone.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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