Not many people know that different types of credit are designed to suit different circumstances and different individuals.
However, being aware of the kind of credit you’re getting can have a huge impact on the amount of debt you accumulate. Choosing the right kind of credit, one which suits your finances, could potentially save you hundreds of pounds a year in interest.
Some tips for clear-headed thinking when it’s time to apply for credit
Before you start, gather together your bank statements and bills and take a look at your credit report. Then try to answer these questions as honestly as possible.
- What are my monthly living expenses?
- Am I managing to live within my means?
- How much do I owe at the moment?
- Am I making any repayments at the moment, and how much more can I afford to repay?
- Have I done everything I can to score points on my credit rating? Lenders use the electoral roll to check that you live where you say you do, so register to vote. Also close unused accounts. Make sure all the details are correct on your credit report, the tiniest error can have a profound effect on your rating.
- Have you paid off everything you can pay off? Set aside some time each month to ensure that all your repayments have been made, review the deals you have and check your credit report
- Do I have a shortlist of credit providers to apply to? Every time you make a credit request it gets registered and so suppliers might get suspicious that you’re looking for credit in desperation. So be careful how many applications you make.
Beware of slippery slopes
Once you’ve answered these questions, it’s time to start looking for credit. Here are some questions to ask yourself to help you keep your interest payments as low as possible and avoid ending up with more debt than necessary.
1. Have I checked out all the credit options and compared them?
Compare all the options when it comes to interest rates, and pay special attention to whether the interest might be higher on a loan or a credit card: a credit card might give you a source of money but it may be safer to go for a loan that you have to pay off within a fixed period.
2. Am I looking for credit to buy a specific, high value item?
Depending on how much you spend, it may be cheaper in the long-run to apply for a loan, rather than to run up excessive interest on a credit card. This might apply if you want to buy a car or an item of high value.
3. Am I spending over my means by using credit on a store card?
You might get used to reaping the benefits of a store card if you’re a faithful customer, but you might equally be losing out to high interest charges on outstanding balances. If you can’t pay off the balance every month, you’re likely to be losing out.
4. Have I got enough money to cover costs when interest-free deals end?
There are lots of good ’0% interest-free credit’ deals out there when it comes to buying white goods and new furniture. But you’ll need to be ready to pay a lump sum when the deal comes to an end. Make sure you’ve got it set aside. Whatever you do, don’t use interest-free cards to get into more debt – focus on saving to be able to make the repayment.
5. Have I read the Terms and Conditions to find out what the penalties are?
If you’re missing out on repayments or making them late, you might get charged a penalty, lose a preferential interest rate and end up racking up even more debt. When you read the terms and conditions, you’ll be alerted to the charges you need to look out for. Remember that a missed or late payment stays on your credit report for at least three years, making you less attractive to potential lenders.