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."