It’s the start of Talk Money Week, where we are encouraged to start open and honest conversations about money. This year’s topic is credit, so read on to find out more…
What is Credit?
Credit is your ability to borrow money, with the understanding that you will pay it back at a later date.
Credit History and Credit Scores
Your credit history is simply your reputation as a borrower and it is used to create your credit score. Your credit score is just a number that lenders use to assess whether they want to lend you money.
If you have a lower score, you’re seen as more risky to lend to. Therefore, lenders may not let you take out a loan from them, or they may let you borrow money but will charge you a higher interest rate. This is because a lower score means that, based on your credit history, you are less likely to repay them the money you owe.
Information is kept on your credit score for six years, so it’s important that you look after your finances.
Helping your Credit Score
To maintain a good credit score, it’s important that you pay any bills on time. You should also avoid going overdrawn.
When you spend more money than you have in your current account, you’re spending from an overdraft. There are two types of overdraft: authorised and unauthorised. An authorised overdraft is when you agree on a set limit with the bank that you can spend up to. You will then pay this back with the addition of interest.
You can improve your credit score by having an authorised overdraft with your bank but not using it, as it shows you’re responsible with money.
Registering on the electoral roll also improves your credit score as it makes it easier for lenders to confirm your name and address.
Installment Credit
Installment credit is when you borrow a lump sum of money and repay what you borrowed (with the addition of interest) in regular fixed payments over a period of time, such as a mortgage.
Revolving Credit
With revolving credit, you can repeatedly borrow money up to a set limit. You will then be charged interest on any balance after each statement’s due date. This means that if you pay the balance in full every month, you can avoid paying any interest.
One example of this is credit cards. Credit cards have a credit limit which is the maximum amount you can spend on the card. If you go over this limit, you will end up with extra charges on top of the interest you’re already being charged.
Remember that this limit is not a target! You don’t need to spend up to your credit limit. In fact, it’s best if you don’t, as this will just mean you owe more money.
It’s a good idea to pay back the full amount you’ve borrowed with your credit card as soon as you’re able to, to avoid being stuck in debt.
Credit Reference File
Credit reference agencies are consulted by lenders in order for them to decide whether to lend to you. These agencies are allowed to collect and store information on your financial behaviour.
When you apply for a loan, you sign a form which gives permission to the lender to check the information on your credit reference file from one of these agencies.
You have a right to ask for a copy of your credit reference file and if you request it, the credit reference agency must give it to you for free. If you think some of the information on the file is incorrect, you can write to the credit reference agency requesting for it to be corrected.