The following is a transcript of a bonus episode of The Pension Confident Podcast - financial mistakes part one. You can listen to this bonus episode or scroll on to read the conversation.
PHILIPPA: Welcome to another bonus episode of The Pension Confident Podcast. And this time we’re bringing you part one of our myth-busting series on common financial mistakes and when to avoid them! Well, listen up, because we’re covering everything from why people become reliant on credit cards to how credit scores actually work.
Before we start, just a reminder that anything discussed on the podcast shouldn’t be regarded as financial or legal advice, and when investing your capital’s at risk.
Let’s kick things off with the first big debt for many people - university tuition fees. In episode 23, Ola Majekodunmi, who founded the financial literacy platform, All Things Money, talked to us about the pressures of borrowing money to go to university.
But there are these big decisions that people make when they’re quite young. I’m thinking about university here actually, that’s a big investment, isn’t it? You don’t necessarily think about it that way when you go, take the loans and rack up all that debt. But that’s something to think about, isn’t it? Because there’s so many other routes of entry now, into all sorts of careers.
OLA: I agree. I honestly wouldn’t have gone to university had I felt well equipped to take another route.
PHILIPPA: Really?
OLA: Yeah. I really wanted to do something like an internship or an apprenticeship. But my school really did put a big emphasis on supporting people going to university rather than those going down the apprenticeship route. So if I wanted to do an apprenticeship, I had to find it myself. I had to actually understand what that was and I didn’t know.
PHILIPPA: That’s a big ask at that age.
OLA: Massive, especially now that I look at my sister who’s that age. I think, “wow, that’s so young”. At the time, the only apprenticeships I came across were in finance. It’s funny, I definitely didn’t want to go down the route of finance at the time. I don’t have regrets about university now, but I am in £65,000 worth of debt, plus interest.
PHILIPPA: It’s a big debt, isn’t it?
OLA: A lot!
PHILIPPA: Pressure to spend can come from loved ones too. Here’s Brooke Day, PensionBee’s Head of Brand and Communications, with Co-Founder of Millennial Money UK, Niaz Azad in episode 27. They talked about feeling the pressure of keeping up with better off friends and their lifestyles.
There’s that pressure to keep up, isn’t there? It’s fear of missing out, whether it’s you or your kids, if you have kids. Or, almost worse, appearing mean.
BROOKE: Yeah, it could be that you’re saving for a house or investing your money, all those other things that people don’t realise that you’re doing with money. Outwardly, they may think, “but you’ve got the money to do that. Why don’t you want to do it?”. And you’re like, “I just don’t want to”. But I don’t want to feel like I have to explain ‘the why’.
PHILIPPA: Yeah, because another survey, Credit Karma survey, nearly half of millennials say they overspend to keep up with their friends. 80% of them who went into debt, kept their debt a secret from their friends. Because there’s a lot of shame around that, isn’t there? But it’s easy to get into debt if you’re trying to keep up, isn’t it?
NIAZ: I think a lot of people don’t realise that they’re doing it. You know you earn a decent salary or you have a regular income and you might not have the cash now, but you’ve got a credit card, which gives you this line of financing and you’re spending money, you’re going out with the forethought that “I’m going to just pay this off at the end of the month”, not realising you’re in a cycle of just financing your lifestyle by doing so. A lot of people don’t actually realise it until they overstretch just that little bit one month, and then it goes into [debt], and that’s how they get you in the consumer credit industry, right?
PHILIPPA: But you don’t see the jeopardy?
NIAZ: Exactly.
PHILIPPA: If you’re in a job, you’re thinking, “it’s fine, I can manage this”.
Sometimes of course it’s just keeping up with the necessities that can land us in debt - especially when you’re starting a family. Mumsnet CEO, Justine Roberts CBE, knows all about that. Here she is in episode 19 highlighting something parents are very familiar with - the astronomical cost of childcare. And the impact that expense can have on family finances.
Now, we’ve all read and heard about how extraordinarily expensive childcare can be. Is it actually true that the average full-time care in the UK for a child under two costs over £14,000 per year?
JUSTINE: Yep. I think that’s right. The UK has one of the highest childcare costs in the OECD.
PHILIPPA: OECD?
JUSTINE: That’s the Organisation for Economic Co-operation and Development. Otherwise known as the club for rich countries!
PHILIPPA: OK, £14,000.
JUSTINE: It’s a huge number, yeah. And actually around 40% of our users say they can’t afford childcare without going into debt or family help. It’s so prevalent now. This isn’t just affecting the poorest, it’s affecting pretty much everyone. We talked already about gender pay gaps and pension pay gaps. That has so many knock on effects on people because they can’t afford to go back to work.
PHILIPPA: Now, let’s talk about something crucial that’s often overlooked: high charges around debt. In episode 29, Holly Mackay, who’s Founder and CEO of Boring Money and PensionBee’s VP Product, Martin Parzonka, discussed the first steps to getting your finances back on track if you’ve got into debt.
Is that the first thing you should be saving for, actually, your emergency cash jam jar?
HOLLY: Absolutely. That for me, is the... I think we all have steps on our financial journey, and there’s an order we should do things in. The first, actually, even before that, would be to pay off any expensive debt. So once that’s done, then absolutely, I think people’s first goal is to get to that three months of outgoings.
PHILIPPA: And just to spell out the reasons for that, if you’ve got debt like that, you’re paying far more in interest, then you’ll gain wherever you put it in savings.
HOLLY: Absolutely. In savings, in an ISA, in whatever it might be, is getting rid of that debt is the very first starting point.
MARTIN: Actually, with the base rate increasing, I think credit cards now are like 30%. It’s insane!
PHILIPPA: Insane. So, if you’re not paying that off every month, that’s a huge bill, isn’t it?
So, let’s rewind a second. If you’ve got debt, and most of us have, what does that mean for your credit score? We covered that in episode 31, when John Webb, the Consumer Affairs Manager at credit rating company Experian, ran us through his list of ‘need to knows’ about credit scores.
PHILIPPA: OK. Let’s start with the basics. John, what’s a credit score?
JOHN: Yeah, great question. So I’ll try and keep this as simple as I can.
PHILIPPA: Sure.
JOHN: Because the credit score is a number that we, ‘we’ being a credit reference agency like Experian, will give you. That number just represents the information that’s on your credit report. So it’s how well you have managed credit in the past, usually for the last six years, and how well you’re currently managing credit, so you know your current outstanding debt and things like that, so that when you apply for credit, although the lender won’t see that exact number, generally, it’s a good indicator of how they’ll view the information on your credit report.
PHILIPPA: What about if you divorce that person or you separate from that person? How do you sever that in your credit record?
JOHN: Yeah, so it’s a really good point. Actually, it’s not, it’s not being married that does it. So actually, it’s kind of, it’s slightly a myth, but it’s not being married, it’s not living with someone, it’s not someone in your family or just that you’re in a relationship with someone. As Clare said, it’s just - the process actually is applying for joint credit together, and it creates what’s called a ‘financial association’ and links you two together. It means when you go and apply for credit, the lender can check that person’s information as well. So if they’ve not been good at managing their credit, it means you could be refused or you could pay more. If you shouldn’t be connected, so you have no open joint accounts together, you could do what’s called a ‘financial disassociation’. You break that link, you have to do it with all three credit reference agencies to do it. It’s a fairly simple process online. But you do that, you break the link, and that way your report is then stand-alone or that person is at least not connected to you anymore.
PHILIPPA: OK. So thinking about other ways of being associated with people, what about people who are all renting a place together. They’re not involved with each other, they’re just flatmates, but they’re all on the lease or they’re all on the rental agreement.
JOHN: That won’t financially connect you. No. The only way it happens is if, like I said, you open a joint account. So something like a joint bank account, a joint loan, obviously a mortgage, joint mortgage as well. Credit cards aren’t a linking account because you add someone as an additional card holder. You’re still the main card holder.
PHILIPPA: Oh, OK, that’s an important point.
JOHN: You have to be careful if you add someone as an additional card holder because the onus is on you, and that’s your account, to be in charge of that.
PHILIPPA: And finally, here’s Brooke again talking about how setting up a simple joint bank account could cast a long shadow on your credit report - if you’re not careful.
If you’re working from home and your flatmate isn’t, are we still splitting the bills down the middle, or...? That’s a conversation, isn’t it?
BROOKE: I think often it’s about social contract. Before you get into these things, having the conversation about it, so whether that’s lending money or how bills are going to be split. I think from my experience, when I was at university, it was the first time I’ve ever rented and moved away from home and we got this house and I definitely had the subpar room, and we just split the cost of the house and the rental amongst [us all]. And now I think, “why did I?”. I think of two friends, they had double bedrooms with ensuites and I lived next to the kitchen by the dishwasher.
PHILIPPA: And paid the same?
BROOKE: And paid the same. And now I think, I wish I’d had the courage to say, “hey, maybe that’s not fair and we should split it a different way because you’re getting a far better deal from this than me”. But I think because I was a bit of a people pleaser, I just said, “oh, it’s fine”. That’s just what you do. But I guess [I’ll] live and learn. And second to that, we set up joint bank accounts to split bills, and I didn’t quite realise then that that could impact my credit score moving forward. And I wish I’d learnt that sooner, that actually, had I lived with people that racked up loads of debt, that would then be impacting me in the future. So I guess that’s something to consider.
PHILIPPA: That’s really worth thinking about. And that wraps up part one of our myth-busting series on common financial mistakes! If you’d like to hear those discussions in full you can listen back to all those episodes wherever you get your podcasts.
A final reminder before we go, that anything discussed on the podcast shouldn’t be regarded as financial or legal advice, and when investing your capital’s at risk.
You can subscribe to the series right now on any podcast app. And all The Pension Confident Podcast episodes are on YouTube or the PensionBee app if that works better for you. In the meantime, keep an eye on our feed - our next episode will be live at the end of the month.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
