What is Credit
Although they all have a similar purpose, there are many types of credit to choose from.
Types of credit
There are many types of credit available. Below we’ve provided descriptions of the main ones:
Credit Cards
A credit card offers you a flexible way to manage your credit needs over time, helpful for spreading the cost of purchases, consolidating existing debts or giving you access to cash when you need it.
You can use a credit card in many retail stores, online and at compatible cash machines around the world. Just be aware, different interest rates, fees and charges may apply to individual transaction types.
Mortgages
A mortgage is a type of loan, enabling you to buy a property, against which the loan is secured. It’s important to know, if you don’t keep up with your repayments, you could lose your home.
A mortgage term could be as long as 40 years, depending on your age and borrowing needs, with both fixed and variable interest rate options available. It’s likely you’ll need to pay a deposit in addition to anything you borrow.
On repayment mortgages, you’ll pay more towards interest at the start, and less as you reduce the balance owed over the mortgage term.
On interest-only mortgages your monthly payments could be lower, but you’re not reducing your balance during the mortgage term, and you’ll need to repay the full amount at the end.
Personal Loans
A personal loan could offer you a fixed borrowing amount, over a term to suit your budget - typically 1-7 years. If approved, the money will be deposited into your selected UK current account, ready to use.
Interest can either be fixed or variable. At the end of your loan term, so long as you’ve made all of the necessary payments, your balance will be repaid in full, which could be helpful if you’re focussed on limiting new borrowing, and clearing old debts.
Store Cards and Credit
Some retail brands offer credit, enabling you to make purchases now and spread the costs over a period of time. Essentially, this works in the same way as a credit card or loan, limited to purchases made with one individual brand or store. Some may also offer tailored benefits and loyalty rewards.
Much like other credit products, interest, fees and other charges may apply, and you’ll need to make regular repayments.
These shouldn’t be confused with cards used solely to collect loyalty points, or retailer branded credit cards, which can be used for other transaction types, and elsewhere on the high street.
Car Finance
If you’re buying a car from a dealership, there are finance options you might like to explore:
With a Hire Purchase plan (HP), you’ll make fixed monthly payments over 1-5 years, and at the end of your agreement you’ll own the car outright, with no mileage limits to worry about.
Personal Contract Purchase (PCP) plans offer lower monthly payments over 1-4 years, with the option to return, exchange, or pay a lump-sum at the end of the agreement to own the car. Just be aware that mileage and return conditions may apply.
Overdrafts
An overdraft is a form of borrowing attached to your current account, which can act as a short-term safety net, whether you need a little extra to cover unplanned expenses, or just to tide you over when you’ve run out of money.
Using an arranged overdraft carefully, i.e. limiting how much you use it, paying it off regularly and staying within your overdraft limit, can boost your credit score. Managing it poorly can do the opposite.
Some banks and building societies will allow you to use an unarranged overdraft, however your credit score could be negatively impacted if you do.
The number one rule of responsible credit use is to always pay your bills on time! Late or missed payments have a big impact on your ability to secure new credit. But, there is more to being a better borrower than making timely monthly payments. Lenders consider the full financial health of an individual who is applying for a credit product, so you will want to make sure that your credit portfolio isn’t lacking in any key areas.
Here are some positive habits that you should focus on developing when managing credit:
- Borrow only what you need! With all types of credit, make sure that you aren’t borrowing any more than what you truly need. Always consider the impact that swiping your plastic can have on your future finances.
- Pay your credit card bills in full every month. Carrying a balance on credit cards can be tempting, especially since minimum payments are usually around 1-3% of your total balance.
- Don’t ignore your service agreements. While your utility company, or landlord probably isn’t charging you interest, late or missed payments can be reflected on your credit report. Your account can even be sent to a collection agency (which is very bad for your credit) if you fail to pay for long enough. Always pay your bills on-time.
- Build a budget. Developing and sticking to a realistic personal budget will help you to better understand what you can and cannot afford and can even help you to plan and save for large future purchases, like a house. See here for our budget planner
- Use no more than 30% of your available credit limit. This is really important for credit cards and personal loans. You should aim to use no more than 30% (but try for less) of your available limit each month. Even if you pay your bill in full every single month, if a lender sees that you are using most or all of your available credit, they will assume that you need all of that credit.
- Focus less on your credit score, and more on developing positive, lifelong habits. You are more than a number, and it is more important to be in good financial health than it is to have a perfect credit score. Work on reducing your spending and eliminating your debt.
- Keep in touch with your creditors. Let them know immediately if you are experiencing problems keeping up with your payments. They can and they will help.
