From advice service MoneyHelper
Credit can help you manage your money – whether you’re looking to cover planned expenses or need to meet unexpected costs. The vast majority of us will use some form of credit at various points in life, but it’s really important to use it in the right way. There are many different channels of credit, and they all have a similar purpose.
So exactly what is credit? Credit is "an agreement between a lender and a borrower that allows the borrower to obtain funds, goods or services now and repay them later." (Experian, 2024)
Different credit products work in different ways but it is always important to think about the basics.
- Interest rates - the amount of interest you will pay back is usually calculated as a percentage of the money you borrow, and the higher the interest rate, the more expensive it is to borrow.
- Credit limit - an agreed amount that you can borrow up to on products like credit cards, arranged overdrafts and store cards. Surpassing your credit limit could lead to additional fees, and it might also impact your credit score.
- Credit score - There are three credit reference agencies, Equifax, Experian and TransUnion, and they all hold information on you which lenders use. Small errors can cause you problems, so it's really important you regularly check through your credit report.
- Make regular payments - the most common way to pay back credit is with monthly payments. It is vital to make payments on time to avoid extra fees or charges. Making late payments could impact negatively on your ability to access credit in the future.
- Other costs - There might be other fees and charges for accessing credit, not just the interest rate. There may be an annual fee, or charges for any late or missed payments. Some credit cards may also charge you if you withdraw cash or use the card abroad.
Did you know you can check your credit score for free? Money Saving Expert tells you how here:
www.moneysavingexpert.com/loans/check-free-credit-report/
If you need to access credit, MoneyHelper's free tool helps you find the different options available – including credit cards, loans, salary advances and many more:
www.moneyhelper.org.uk/en/everyday-money/credit/options-for-borrowing-money
Managing Credit Well
Credit can be very useful, but it can cause problems and potentially debt if you are struggling to keep up repayments. So, how do you make borrowing work best for you? By understanding the cost of your borrowing, you can make sure you’re getting the best deal and can make all the repayments.
There are some important questions you need to ask yourself before you borrow money. For example, can you wait until you have enough money without borrowing? And could you afford to pay it back if you did borrow the money. If you tend to be impulsive when buying things, try giving yourself a cooling off period of at least a couple of days. When you’ve had a chance to think about it, you might change your mind.
Warning – beware of high cost credit
If you have a poor credit score, you might be tempted to use a payday loan company for example. Before signing up for a payday loan or any other type of high-cost borrowing, make sure you’ve explored all possible alternatives.
Warning – look out for loan sharks
Loan sharks often use online channels like social media to try and lend to people. This kind of lending is illegal and it could cost you a lot more than you think.
Buy Now Pay Later
If you’re buying online, paying in a shop or even ordering a takeaway these days, Buy Now Pay Later (BNPL) can seem like a quick and easy way to pay. But BNPL is a form of borrowing so you need to think carefully before using it, especially if you’re spending more than you can afford to pay back. BNPL products are credit products, just like any other loan, so again please think carefully before using it. BNPL can be a useful way to spread the cost of purchases if you use it carefully and can afford the repayments.
“This form of unregulated interest-free credit … enjoyed explosive growth during the coronavirus pandemic, particularly among the under-30s and those with tight finances.” (The Guardian, 2022)
Some retailers encourage people to choose BNPL over other ways of paying by making it the default payment option or offering an incentive, such as a discount or free delivery. But it’s important to give yourself enough time to think about how you’ll repay, and decide if BNPL works for you. Having lots of BNPL agreements of small amounts can start to build up. As well as checking you can afford all repayments on top of any other bills, make sure you keep track of when every payment is due.
According to the Financial Conduct Authority, people who use BNPL services were over four times as likely to have missed a payment of a bill or credit commitment in 2022. This shows that whilst easily accessible, this form of credit can lead to you spending more than you can afford, possibly resulting in problem debt.
And finally…
We often make purchases in this country without allowing ourselves enough time to think them through thoroughly. Credit can be a valuable resource, we know that, but make sure you consider any form of borrowing within the context of your wider financial situation and circumstances.
The Government’s Money and Pensions Service can support all those who need it with free, independent and impartial money and pensions guidance. They exist to help you and your families whatever your money questions or concerns.
0800 138 7777