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What is credit?
With so many types to choose from, how do they differ and how does credit work?
A simple description
Credit gives you access to money now, allowing you to spread repayments over a period of time. This could come in handy if you need to make a larger purchase, manage an emergency your usual budget won’t stretch to, or if you want to consolidate debts you hold elsewhere.
Lenders may charge you for using their services – usually interest as a percentage of anything you borrow. Other fees and charges may also apply.
How credit works
Although they all work slightly differently, credit account features might include:
Common types of credit
Below we’ve included a short description on the most common types of credit:
Where can you get credit?
Below we’ve listed the main lender types here in the UK:
Secured or unsecured borrowing?
Secured borrowing includes things like mortgages and some forms of car finance, where the money you borrow is secured against one of your belongings, such as your home or car.
If you don’t meet the terms and conditions of your credit agreement, such as making regular repayments on time, your property could be repossessed. In addition, it’s likely to negatively impact your credit score.
A benefit of secured borrowing, however, is that your interest rates may be lower.
Unsecured borrowing includes things like credit cards, personal loans and overdrafts, where the money you borrow is not secured against your belongings. But borrowing costs could be higher.
It’s still important to manage these accounts carefully. If you don’t meet the terms and conditions of your credit agreement, including making regular repayments on time, your credit score might be negatively impacted, which could make it harder for you to get credit in future.
What is a credit score?
When you apply, lenders and service providers contact their preferred credit reference agencies to check your credit record, which may highlight any potential risk of offering you credit. This information could also influence any interest rates and the amount of credit offered.
Not only that, but lenders and other service providers do their own credit scoring (PDF, 69.8kb) when you apply for credit, looking at information from your credit record. They also consider other factors like affordability and any past account history.
How credit affects your credit score
How you use and manage credit is just one thing which could influence your credit score, although the amount you borrow, the age of your accounts and how well you manage payments and credit limits can all affect your rating.
Other factors include whether or not you’re on the electoral register, how often you move and change addresses, how well you manage household bills, and even the credit history of someone you have joint accounts with.