Credit means borrowing money and paying it back, often over time, and usually with interest added.
Throughout your life, there may be times when paying for things with credit would be helpful, and others where it would be challenging to pay by any other means. For example:
As a general rule, try to avoid using credit to cover your everyday expenses where possible.
When you want to borrow money, you can apply to your bank or another lender. All financial institutions have a duty to lend responsibly.
Whether or not they lend to you, and the interest rate and terms they offer, depends on a number of factors:
Your ability to obtain credit, and on favourable terms, will also depend on your history of borrowing and paying back money in the past. Lenders refer to this as your credit history, which is sometimes expressed as a score. They want to assess how reliable you are at borrowing money and then paying it back.
You can usually find out your credit score, and check that your credit history is being reported accurately, often without charge. There are several benefits of doing this regularly:
| Positive reporting | Your history of paying back credit consistently and on time.
Your levels of unused credit.
The infrequency of your applications for credit. |
|---|---|
| Negative reporting | The number and frequency of late credit card and other credit repayments.
The amount (%) of credit in use.
The frequency of your applications for credit. |
| Positive reporting | Negative reporting | Negative reporting |
|---|---|---|
Your history of paying back credit consistently and on time.
Your levels of unused credit.
The infrequency of your applications for credit. |
The number and frequency of late credit card and other credit repayments.
The amount (%) of credit in use.
The frequency of your applications for credit. |
The number and frequency of late credit card and other credit repayments.
The amount (%) of credit in use.
The frequency of your applications for credit. |
If you need to improve your credit score, here are 5 steps you can take:
Selecting the appropriate credit to apply for may depend on whether you are looking to borrow for the short, medium or long term.
Examples might include needing to cover your costs until you get paid next, or having to find the money for a boiler repair or other unforeseen expense. For these such examples, the following types of credit are typically used:
Arranged overdrafts let you continue spending money from your bank account when there is no money left in it. You will agree an arranged overdraft limit with your provider – which is the maximum amount that can be borrowed. You will usually pay interest on your overdraft, although sometimes you will have an initial, interest-free overdraft limit.
Credit cards enable you to buy or pay for things now, and then repay them at a later date. If you owe money, you have to make at least a minimum payment each month – which is usually a percentage of what you owe. If you don’t repay the amount you owe in full each month, typically you’ll be charged interest. You’ll have a credit limit, which means you can spend as much as you need on the card up to that amount.
Credit cards may help you spread the cost of regular, or one-off, purchases. If you don’t have an emergency fund, credit cards can also provide back-up to cover unexpected costs.
Remember that the amount you owe – money you’ve spent on the card, plus interest – can mount up if you’re not careful. Try to pay back as much as you can each month. The more you pay back, the less interest you’ll be charged.
Payday loans – sometimes called book up loans - are a type of short-term credit, designed to tide you over until your next pay day. Usually you will pay back the loan in full the day you are paid. These types of loans often carry a very high interest rate and should be avoided.
Short-term debt solutions may be risky because they typically carry much higher interest rates. Where possible, try to avoid using short term debt solutions when covering unexpected expenses.
Examples might include buying a car, paying for a holiday or for home improvements, where it might be helpful to be able to spread the cost of a purchase. For examples like these, the following types of credit are typically used:
A loan is where you borrow a set amount of money for an agreed amount of time. You pay back the full amount – usually in monthly instalments – plus interest. They may also be used to consolidate multiple debts into one. With a single monthly repayment and interest rate, this may make debts easier to manage.
Note that spreading your payments over a longer period means you may end up paying more overall.
Used carefully, certain medium term commitments can be funded using a credit card – ideally, one that charges a particularly low interest rate for a defined period, or even no interest at all.
Examples might include the cost of building or purchasing a home. For substantial, long term debts like this, a mortgage is the most commonly used type of credit.
A mortgage is a loan used to purchase property. Note that the loan is secured against your home’s value until you have finished paying it off, which means that you may lose it if you are unable to keep up with the repayments.
Sometimes it isn’t always obvious that you are making a purchase on credit. For example, you may be offered the option of deferring the payment of an item (for example, a new sofa) for a few months, or paying for a higher value item, such as a new television, in a number of separate instalments.
Make certain that you can keep to the terms and conditions of the offer, and read the small print carefully. If you cannot make payment in full by the due date, under the terms of the offer, you may then be charged interest at a much higher rate than if you had purchased the item using a different type of credit.
Before applying for credit, it’s really important to make sure you can afford to keep up with your repayments comfortably. If you miss one or more repayments:
If you find yourself in a situation when you cannot meet your repayments, you should consider:
