Credit vs savings

The UK is experiencing a monumental cost of living crisis as millions of households struggle to cover the cost of daily essentials.

But with prices expected to keep rising, an unexpected expense, such as a sudden medical emergency or job loss, could be the final straw that sends your financial situation spiralling.

This widespread fear has led to a surge in credit applications with research revealing that, amidst the current economic climate, people would rather apply for a short-term loan than spend their hard-earned savings.

So, should you choose credit or savings to fund a large or unexpected purchase? In this article, we’ll explain both sides of the credit vs savings debate so you can make the right decision for you and your finances.

Should I pay with credit?

If you have been faced with a financial emergency but don’t have the spare cash to cover the cost, you might have no choice but to go down the credit route.

The cost of living crisis has led to a spike in the number of people opting for credit if it means steering clear of their savings as the UK experiences the biggest drop in living standards since the 1950s.

But this can be a slippery slope with the total finance price sometimes more than the total cash price once interest has been factored into the equation and this triggering a debt cycle that can have a disastrous impact on your finances.

If the unexpected expense costs more than you can comfortably afford to repay within the interest-free period, however, a short-term loan might make better financial sense.

There are also some circumstances when a credit card is recommended but this should only be considered as a last resort as it will lead to higher monthly payments and damage your credit score.

Should I pay with savings?

If you are in urgent need of financial rescue and have plenty of spare cash sitting in an emergency fund, it might be in your best interest to dip into your savings.

This can allow you to cover the cost of an unexpected or large purchase in a single transaction and avoid paying more than you bargained for or digging yourself further into debt. It will also have no impact on your credit score which can prevent any further damage if your financial situation is less-than-perfect.

If you have a steady income and a good credit score, breaking the cardinal saving rule and dipping into your emergency fund can be the difference between you maintaining optimal financial health and getting trapped into an endless cycle of snowballing debt.

This is, however, not always an option with 9% of people in the UK admitting to having no savings and 41% unable to survive for more than a month without income.

It can be a bitter pill to swallow to watch a significant chunk of your savings disappear in the blink of an eye, but, compared to the financial and mental stress that comes with credit repayment, it is a relatively quick and pain-free process.

Can I pay with credit and savings?

There are advantages and disadvantages to funding a large or unexpected purchase with credit and savings but if you are still on the fence, it is possible to get the best of both worlds.

The so-called ‘charge-it-and-pay-it-off’ method involves charging a large purchase to a credit card and paying it off immediately or within a certain interest rate period.

It can mean you avoid paying interest, benefit from extended product warranties, and receive rewards in the form of bonus points, airlines miles, and cashback.

Ultimately, whether you choose credit or savings will depend on a number of factors including your financial situation, credit history, and ability to repay money borrowed.