MONEY: Avoiding problems with credit

While retirement is full of opportunities, they are often shaped by how much money we have to spend on pursuing them. Using credit or any kind of loan can seem like an easy way of accessing more money, but it can lead to debt.

 

Here is a look at how to use credit sensibly.


Why use credit?

Here are two examples of how credit might be used:

  • to go on a once-in-a-lifetime trip or make home improvements;
  • or it can be to pay for day-to-day essentials that can become increasingly hard to afford

The difference between repaying debt and struggling with debt is all about knowing what type of credit is best for your circumstances. Understanding the different types of credit available is key to this.


What type of credit will suit you?

There are lots of different types of credit available with various terms and conditions. Here are  the main ones:

  • Credit cards: No interest is charged on borrowings if you pay your full bill within a set number of days. However, credit cards are not suitable for long-term borrowing as interest rates are high. Remember that you may also be charged for borrowing cash.
  • Personal loans: These loans are suitable for medium and longer term needs. Generally, you pay a fixed amount back every month and many lenders will allow you to pay it off sooner.
  • Overdrafts: An overdraft is suitable if you have short-term cash problems.
  • Payday loans: Payday loans are usually small short-term loans that have very, very high interest rates and if you don’t pay the loan back on the date it’s due the lender will add extra charges to your account; these charges are often very high.
  • Hire purchase: These are hire agreements offered by shops where you can hire and eventually buy particular items such as furniture or electronic equipment. You do not own the item until the last instalment of the loan is paid.

Deciding what type of credit is right for you

When deciding what type of credit is appropriate for your circumstances, you should consider the following:

  1. Do you need to use the credit or do you want to? If you need to, you may have a personal finance problem and should seek free money and debt advice before you seek credit. If you want to, consider other ways that you could pay for it before you use credit because it will always cost you more if you use credit.
  2. Choose the best terms and conditions: If having considered that question you still want to use credit, you need to consider the different terms and conditions of the various types of credit, choosing one that matches your needs as well as ability to repay.
  3. Then shop around for the best deals: There is a range of price comparison websites that will be able to help you with that.
  4. How will repay your debt, realistically? Before you apply for any credit, realistically work out how you will repay it. It is essential that you make allowances for extra demands on your finances, and understand any charges and interest that you will accumulate if you cannot repay your credit as planned.

MORE INFO

Age UK website – full of really good articles on a huge range of finance issues.

Download AgeUK’s debt guide (pdf)

StepChange, the Debt Charity shares its tips on how to use credit without getting trapped by debt.

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