What is credit?
A credit agreement is one where someone borrows money to obtain goods or services now, withthe promisetorepay it at a later date. These agreements usually include interest charges.
While you might not want to pay more than you have to, sometimes credit can help you coverunexpectedcosts, or enable you to make a big purchase like a house. Proving you are able to borrowcredit andrepayresponsibly can also have benefits in the future. Learn more below about some of theadvantages of usingcredit.
Emergency payments
Sometimes the unexpected happens, and you may have to make a large, unexpected payment.Whether yourboilerbreaks, your washing machine needs replacing, or your car needs some essential repairs,credit can helpyoucover the emergency costs and any upfront fees. This can help you save time and free youfrom anyunwantedstress of trying to pull the money together.
Buy now, pay Later
Using credit can let you make purchases you may not be able to immediately afford. This canbe helpfulforhousehold items such as televisions, refrigerators, or sofas, as well as for biggerexpenditures like ahouse or a car.
Without the option of taking out credit, it can take a long time to save up for these things.However,it’simportant to note that most lines of credit charge interest, which you will need to pay backin additiontothe cost of the item.
Balance transfers
Balance transfer credit cards can let you transfer your outstanding debts onto one creditcard, where youcould pay interest at a lower rate or possibly no interest at all. This can make yourrepayments easiertomanage as they are all combined into one single monthly payment.
However balance transfer cards can require you to have a good credit score, and they can alsoinclude anadditional charge. The interest rate advertised can often be temporary, with the ratereturning to thelender’s typical APR after the period of time ends, and if you make purchases using thebalance transfercard you may also be charged at the typical APR.
Consumer protection
Section 75 of the Consumer Credit Act holdscredit cardproviders jointly liable with the retailer for anycontract breaches or misrepresentation involved in purchases made for between £100 and£30,000.This can protect you from losing money when there is a problem with a purchase – for exampleif the itemisfaulty, or the company selling the item goes out of business.
Your credit score
There are different types of credit score that you may encounter when either applying forcredit orresearching your credit history. A score from a credit reference agency like Equifax isbased on theinformation Equifax has about your credit history. This includes things like repayments ofloans, creditcard balances, data that is kept on the electoral register and other forms of credit you mayhave used.Thisscore can help indicate how a lender may view your creditworthiness.
Lenders may also use a credit score when assessing your application. This could be based onthe type ofinformation mentioned above as well as data that you have included on your application e.g.your salary.Taking out a line of credit and repaying it fully and on time could be positively reflectedin yourcredithistory as it shows you are capable of keeping up repayments, this may then in turn have aneffect onthecredit score you are given by a credit reference agency or by a lender.
Providing lenders with a good credit history (credit paid on time and in full over a periodof time), mayhelp you improve your chances of a successful application, as it can show lenders you arefinanciallystableand can repay money you borrow.
A good credit history can be advantageous for future credit applications such as a mortgage,and mayimprovethe chances of your application being successful. A good credit history may also positivelyaffect yourchances of being offered a low interest rate or a high credit limit.
Common risks
While credit can be beneficial if used responsibly, there are also a number of risksassociated withit:
- As credit is a form of borrowing, it can lead to debt that can become difficult tomanage if itbuilds up.If this is not remedied it can cause serious financial problems – such as having a CCJregisteredagainstyou or losing your home in some circ*mstances.
- Missing or making late repayments can mean you may have to pay extra, either in the formof interestor anadditional charge. This may mean you end up paying back a lot more than you borrowed,and can alsonegatively affect your creditworthiness in the future.
- Using a lot of credit can imply that you are financially stretched, and making a numberofapplicationsfor credit in a short space of time can reduce the likelihood of you being accepted.
Using credit or finance over debit or cash can help give you some important financialbenefits if you useitresponsibly. Read more information on credithygienepractices that might help you improve your creditscore, or if you would like to learn more about your credit history you can get access toyour , which is free for 30 days, then £14.95 per month.
