Have you ever borrowed to buy something you needed ‘right now’? Perhaps you’ve used loans, credit cards or hire purchase to get a home, pay for a holiday or cover the cost of gadgets or emergency repairs?
Whatever it was, did your borrowing leave you better off – with more cash available to you after you’d bought something?
If that sounds like a contradiction, it’s time to take a closer look at how credit works, how it can leave you better off, and when it’s a fast route to a rip-off.
CREDIT THAT WORKS FOR YOU
Let’s face it – some borrowing is unavoidable. Most of us couldn’t afford to buy a home without a mortgage, for instance, or go to university without a Student Loan. Crucially, these are examples of debt with positive outcomes: they can increase your net worth or rein in other costs (such as emergency repairs).
This bigger picture – what your debt buys you in the long term, and how it impacts on the rest of your income or spending – can be a useful way of judging whether credit is right for you.
Planned debt can help you achieve things that leave you better off and get better deals on borrowing. You get to spread your costs over relatively low, regular payments, freeing up the rest of your income to spend elsewhere, and leaving you more in control of your purse strings.
If that all sounds wonderfully liberating, it can be: the key is whether you can afford the repayments now and in the future, such as if interest rates on a loan increase, or your income takes a knock. It’s important to consider the long view before overstretching yourself – even a mortgage can seem like a millstone once you start missing payments!
The checklist that can help you stack up your options and stay in control:
- How does debt – and what it buys – fit into your financial goals?
- Will it pay for something that increases in value, improves your income, or helps you avoid further spending in the long run?
- Can you afford the repayments? How will they affect your other essential costs?
- What kind of hit will your finances – and home life – take if for any reason you can’t pay it back?
- Have you got the best borrowing deal?
CREDIT THAT WORKS AGAINST YOU
There are times when credit may be the right choice for you – particularly in an emergency – but not all credit is created equally.
Credit can work against you when you don’t have a sound borrowing strategy, or if you use it to pay for things that you can really do without, can’t afford to repay or could have saved for up front. Paying for that dream holiday on credit may be tempting – but the cost could burn you long after the tan fades!
Remember that loans and credit products exist to make lenders money. It’s worth sussing out who benefits the most from your debt: it could be you, if you borrow wisely, or the lender, if you take on more than you can afford. Make sure you come out on top by comparing all your options first!
Short-term credit is a prime example. Most credit cards offer interest-free borrowing for the first month after spending on them: repay in full when you get the bill, and you avoid any extra costs. Only ever pay the minimum each month, however, and the interest soon mounts up and makes your spending increasingly expensive. Unlike a lottery jackpot, this type of rolling over is not good news!
Clues that credit is working against you:
- You can only manage the minimum payment each month.
- You’re regularly landed with extra fees for missed payments.
- You’re not sure how much you owe, and avoid thinking about it.
- Your debts stop you meeting other household costs.
- You have emotional responses to spending, such as hiding bills, or feeling overwhelmed by debt.
If any of these ring true for you, it’s time to grab borrowing by the horns. Pause for thought before taking on more