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.
Tips for managing credit
- Only borrow what you need and can reasonably afford to repay. Try to find introductory or promotional interest rates if they’re available to you.
- Make sure you understand the cost of borrowing, including interest, fees and other charges.
- Check your statements and online accounts regularly, helping you to keep track of your balances, transactions and payments.
- Make payments on time to avoid extra fees and charges, losing any introductory or promotional interest rates, and to limit any impact on your credit score and record. Setting up a Direct Debit could be one way to ensure you pay on time, so long as there are funds available in your nominated bank account when your payment is claimed.
- Try to repay as much as you can, reducing your balance and the amount of any interest you pay overall. Just be aware that early repayment charges may apply. This could also stop you falling into persistent debt.
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.
A summary on credit
Credit gives you the option to purchase now, and repay what you’ve borrowed over a period of time.
- Interest, fees and charges might apply to anything you borrow.
- There are lots of credit options available, including personal loans, credit cards, mortgages, car finance and overdrafts.
- Borrowing can be either secured, like a mortgage, or unsecured, like a credit card.
- To avoid additional fees, charges and any negative impact to your credit score, you must make repayments on time and stay within any pre-agreed credit limits.