Credit Where It’s Due

Borrowing money may be unavoidable at times. Here’s what you need to know

Rather than thinking of credit as ‘good’ or ‘bad’, it can be more helpful to think about whether it’s manageable. This means your ability to pay it back and whether the total cost of credit outweighs the benefits of what it bought.

Say you use your credit card to pay for a holiday but end up taking a year to pay off the balance. Chances are you’ll pay more than the holiday was worth (thanks to accumulating interest during that time) and will be stuck with the costs a long time after that week in Halkidiki or wherever. If during that time you also struggle to make your monthly repayments, you might find it has a knock-on effect on other debts you have, not to mention on your stress levels and sleeping patterns.

Things can start to go a bit banana-shaped when they’re used poorly

We’re not saying you shouldn’t borrow money — and we’re definitely not saying you shouldn’t go to Halkidiki with Kev and Larry. We are saying “know what you’re getting into”. Money might be tight right now but saving for something usually means paying less than getting it on tick, and puts you in charge of your outgoings. Bottom line? Know why you want to borrow money, whether it’s worth it and if there are better ways of getting the cash.

Student Borrowing

When you have a means of paying back your debts, credit cards and loans can be useful tools to get what you need in life (from an education to a mortgage). Things can start to go a bit banana-shaped when they’re used poorly, or to try to cover more serious issues like low income — get some expert advice to get things back on track.

While it may be on better terms, the Tuition Fees Loan is still a form of credit (but one which pays for something — your degree — that has significant value). If you can’t get by without borrowing for daily/other costs and you’ve already asked/exhausted your folks, a fee-free overdraft should be your next port of call.

Why Credit Is Tough to Shift

Say you spend £100 on your credit card buying that band merch you really want (…we don’t judge).

If you pay the £100 back in full when you get your monthly statement, you clear your balance and everything’s rosy.

If you only make the minimum payment (say £5), your balance is now £95. If your monthly interest rate is 2%, you carry forward a balance of £96.90* — you’ve only reduced your debt by £3.10. If you only make the minimum payment each month, it could take up to two years to clear your £100 spend, which means:

1. Thanks to interest, you’ll pay back more than you borrowed; and

2. That band will probably have split up by then, anyway.

*We’ve used a simplified example to illustrate that the longer you take to repay a loan, the more it costs. How much it actually costs depends on the credit card, the interest rates and even when in the month you make your purchase.