What is credit?
Credit is borrowed money that you can use to purchase things you need when you need them and then repay the funds back at a later date, usually in regular instalments.
- Money coming in to your account is an income or a credit to you.
- Money going out, which reduces the money you have, is called a debit.
- One person’s debit is another person’s credit and vice versa.
- Credit is money that you borrow such as a loan or an overdraft. (Credit and store cards are types of loans.)
- Credit must be paid back and so-called free credit will always be paid for in some way.
- Getting something on credit can make a product or service affordable, such as buying a car. If you can afford the repayments this can be a good thing.
- Loans from companies and organisations vary in the length of repayment and charges you pay – this is the interest or extra money you will have to pay on top of the amount you borrow.
- The Annual Percentage Rate (APR) is a standardised way of expressing the amount of interest to be repaid. Generally the lower the APR, the better the deal is.
- Shop around and be mindful that a low APR spread over a number of years may mean you end up paying more interest overall then a higher APR spread over 1 or 2 years.
- When you purchase something on credit, check what happens if a payment is missed.
Credit cards
Credit cards allow you to spend money when you want and let you pay back all or part at the end of each month. If you can’t afford to pay back everything that you have spent each month then the lender will charge you interest and this is how you can easily find yourself in debt.
- These are only available if you are over 18 and have a regular income.
- You can pay for purchases on your card up to an agreed limit.
- You then pay back some or all of the money you owe when you receive your monthly statement.
- Credit card companies charge interest on the amount you borrow, so you could end up paying a lot more for the goods you buy.
- You need to pay back a minimum amount each month, but if you only pay the minimum your debt reduces very slowly.
- It is very easy to get into difficulties with a credit card.
Store cards
Store cards are similar to credit cards, but purchases are limited to the store that issued the card.
- Free for short-term loans of a few weeks, providing balance is cleared each month.
- Can take a long time to repay and often has a very high APR.
Useful websites
Advice Guide
The Advice Guide website is the main public information service of Citizens Advice, providing information on your rights – including a section on borrowing money.
What About Money
Provides impartial financial advice for young adults – includes information on the different ways to borrow.
The Site
Provides fact sheets and articles on all the key issues facing young people – includes information on credit and debts.
Money Made Clear
Provides impartial information and tools that can help you work out what’s right for you – Includes a section on cards and loans.
Directgov
Website of the UK government for its citizens, providing information and online services for the public all in one place. Has a useful section on credit and store cards, credit and loans.
Online tools
Loan Calculator
Can help you decide whether you can afford the repayments, and help you compare different loans.
Mortgage Calculator
Can help you estimate the size of mortgage you can afford at a particular interest rate.
Budget Calculator
This simple budget calculator will help you work out how much money you have available each month.
Debt Test
Can help you to find out how likely you are to have problems with your borrowing over the next year or so.
Credit Card Repayment Calculator
Use this handy repayment calculator to work out when you're likely to pay off your credit card bill and how much more quickly you could pay it off by making a higher monthly repayment.
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