Borrowing money through credit is widespread in the UK and this is
reflected
in
steadily rising levels of personal debt. It is very
important to use credit wisely. Bad decisions about
borrowing often lead to problem debts, especially when interest
builds up over a period of time*. Poor use of credit is
recorded on your
credit file and can make borrowing
difficult in the future, so you might have problems applying for a
mortgage or loan. If you use credit well, then this will
improve your credit rating.
Borrowing money will affect your quality of life in the future
because you'll need to use some of your income to make
repayments. If you're going to use credit then use it
sensibly, make sure you know exactly what you're signing up for,
and choose what's best for you.
What Is Interest?
Interest is the charge that you pay to a lender for renting
money from them. The amount of interest is usually described
by the APR (Annual Percentage Rate), which is the
rate of interest that you will pay on the money you have borrowed
over a one year period. You can use the APR to work out how
much interest you will pay, but you also need to take into account
how long you will be making repayments as this will also affect how
much you have to pay back.
What's the best way to borrow money?
Not all debt is the same. Some types of debt are better than
others. As a student the best ways of borrowing are:
- The Student Loan: this is the cheapest from of
long term debt. The rate of interest is currently 4.8% and is
reviwed in March every year. As it is linked to the rate of
inflation, the amount that you pay back will be worth roughly the
same amount as you originally borrowed. You don't make
repayments until after you've finished your studies and are earning
at least £15,000 a year. The repayment amounts are linked to
how much you earn so they will be affordable.
- Interest free overdraft: most student bank
accounts offer this facility. Make sure you don't go over
your limit or you will be charged.
Questions to ask yourself:
- Do I need to use credit? Would it be better to
save up and avoid paying interest, or is it vital to have this item
right now? It may well be better to avoid the temptation.
- What is the APR? This will tell you how
much you'll pay in interest. Remember to also check how long
repayments last as this will also affect the amount that you
repay.
- Are there any other charges? Sometimes
there are setting up fees etc as well as interest.
- Can I realistically afford the
repayments? You'll get yourself into real
difficulties if you can't.
- Is there an interest free period? You won't
pay interest on most credit cards if you pay all the balance by a
certain date .
You can find more
information about credit and borrowing from the
Directgov website, the Citizen's Advice Bureau
website or the
FSA's Money Made Clear website.
The FSA have produced information about credit cards and store
cards. Click here to
download.
*This is where interest compounds, and you end up paying
interest on your interest. This can happen if you have a
credit card and only make the minimum repayment each month.
"The Smart Money initiative at the University of
Westminster is part of a national project aiming to improve
students' financial capability, led by the Financial Services
Authority."