Credit: Why do People Use it?

What is credit?

A credit agreement is one where someone borrows money to obtain goods or services now, with the promise to repay it at a later date. These agreements usually include interest charges.

While you might not want to pay more than you have to, sometimes credit can help you cover unexpected costs, or enable you to make a big purchase like a house. Proving you are able to borrow credit and repay responsibly can also have benefits in the future. Learn more below about some of the advantages of using credit.

Emergency payments

Sometimes the unexpected happens, and you may have to make a large, unexpected payment. Whether your boiler breaks, your washing machine needs replacing, or your car needs some essential repairs, credit can help you cover the emergency costs and any upfront fees. This can help you save time and free you from any unwanted stress of trying to pull the money together.

Buy now, pay Later

Using credit can let you make purchases you may not be able to immediately afford. This can be helpful for household items such as televisions, refrigerators, or sofas, as well as for bigger expenditures like a house or a car.

Without the option of taking out credit, it can take a long time to save up for these things. However, it’s important to note that most lines of credit charge interest, which you will need to pay back in addition to the cost of the item.

Balance transfers

Balance transfer credit cards can let you transfer your outstanding debts onto one credit card, where you could pay interest at a lower rate or possibly no interest at all. This can make your repayments easier to manage as they are all combined into one single monthly payment.

However balance transfer cards can require you to have a good credit score, and they can also include an additional charge. The interest rate advertised can often be temporary, with the rate returning to the lender’s typical APR after the period of time ends, and if you make purchases using the balance transfer card you may also be charged at the typical APR.

Consumer protection

Section 75 of the Consumer Credit Act holds credit card providers jointly liable with the retailer for any contract breaches or misrepresentation involved in purchases made for between £100 and £30,000. This can protect you from losing money when there is a problem with a purchase – for example if the item is faulty, or the company selling the item goes out of business.

Your credit score

There are different types of credit score that you may encounter when either applying for credit or researching your credit history. A score from a credit reference agency like Equifax is based on the information Equifax has about your credit history. This includes things like repayments of loans, credit card balances, data that is kept on the electoral register and other forms of credit you may have used. This score can help indicate how a lender may view your creditworthiness.

Lenders may also use a credit score when assessing your application. This could be based on the type of information mentioned above as well as data that you have included on your application e.g. your salary. Taking out a line of credit and repaying it fully and on time could be positively reflected in your credit history as it shows you are capable of keeping up repayments, this may then in turn have an effect on the credit score you are given by a credit reference agency or by a lender.

Providing lenders with a good credit history (credit paid on time and in full over a period of time), may help you improve your chances of a successful application, as it can show lenders you are financially stable and can repay money you borrow.

A good credit history can be advantageous for future credit applications such as a mortgage, and may improve the chances of your application being successful. A good credit history may also positively affect your chances of being offered a low interest rate or a high credit limit.

Common risks

While credit can be beneficial if used responsibly, there are also a number of risks associated with it:

  • As credit is a form of borrowing, it can lead to debt that can become difficult to manage if it builds up. If this is not remedied it can cause serious financial problems – such as having a CCJ registered against you or losing your home in some circumstances.
  • Missing or making late repayments can mean you may have to pay extra, either in the form of interest or an additional charge. This may mean you end up paying back a lot more than you borrowed, and can also negatively affect your creditworthiness in the future.
  • Using a lot of credit can imply that you are financially stretched, and making a number of applications for credit in a short space of time can reduce the likelihood of you being accepted.

Using credit or finance over debit or cash can help give you some important financial benefits if you use it responsibly. Read more information on credit hygiene practices that might help you improve your credit score, or if you would like to learn more about your credit history you can get access to your Equifax Credit Report & Score, which is free for 30 days, then £7.95 per month.

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