Credit: Borrowing options

There are different ways to borrow money. Each one carries a different risk. All of these types of borrowing show up on your credit record, which other lenders can see.

Not keeping up with payments will affect your credit score. This may make it harder to borrow money in the future. Probably the most common is an overdraft, which is when you spend more money than you have deposited in a bank account.

There are two main types: an arranged overdraft and an unarranged overdraft. An arranged overdraft is one that you have agreed with a bank before using. Often the bank offers you this, but sometimes you’ll have to ask them first. This is the cheapest type of overdraft. An unarranged overdraft is when you spend more than you have without asking first. The bank covers it, but they’ll probably charge you more for the trouble, so this type is more expensive than an arranged overdraft. Overdrafts can be useful if you need a quick backup, but if you lean on them too much, the bank keeps charging you while you’re using it,

and it almost certainly won’t be the cheapest way to borrow.

Credit cards are another common form of borrowing. These can be with your bank or with another provider. You receive a card with a credit limit. This is the amount the provider has loaned you.

This limit is decided based on a range of factors, including your income and your credit rating. A credit limit is a maximum amount you can owe on the card, which is a total of what you’ve spent, plus any interest or charges the provider adds. Credit card interest has no legal cap, but common rates can range from 0% right up to 25% APR.

Comparison websites can help you find the best deal. With credit cards, you are offered three main ways to repay. Firstly, you can pay off the whole balance in one go (clearing everything you owe). This is the cheapest option, often free if you pay in the same month you borrow. Secondly, you can pay the minimum amount which is set by your provider. This is often where problems can arise, as the minimum amount often isn’t enough to stop big credit card debts from growing rather than shrinking.

The provider adds interest every month, and sometimes the minimum doesn’t cover this, so you end up owing more with each month that passes.This is when the concept of compound interest works against you. You can learn about compounding in more detail in another of our videos. The third is paying an amount you set that covers the minimum with some more on top. This is the best option when you’re trying to clear a balance.

You add whatever you are able to spare to the minimum payment and you pay this. Using a credit card occasionally isn’t a cause to worry, but if you’re finding that you are struggling to pay the minimum, you should call the provider early to discuss your options.

Personal loans are a financial product separate to your bank account or credit card. You can ask the lender to borrow a certain amount. They go away and do some checks on you before confirming this amount or sometimes offering you a different sum.

There’s always a cost involved in personal loans reflected in the APR. When you take one out, you agree to pay it back in regular instalments, usually by paying a set agreed amount each month. It is worth doing a lot of research before taking out a loan like this. And note that in some cases, particularly if you need under £3,000, a credit card may be cheaper. 

In recent years, we’ve seen buy now, pay later – another credit option promoted more through high street retailers. Buy now, pay later schemes do exactly what they say. They offer you the opportunity to buy something without having to pay for it until a later date. This lets you spread payments over an agreed number of weeks or months, often with no interest

if you pay on time. For example, you could be required to make repayments every two weeks for up to three months. If payments are late, fees and interest can add up. It’s also easy to overspend and missing payments can mean damage to your credit score. A common trap here is to take on more than one buy now, pay later product at the same time. With these products, the risk isn’t just what you borrow, it’s how many plans you’re juggling, especially as there isn’t one place where you can see who you owe money to. And, not all of these products are regulated by the Financial Conduct Authority, which makes sure that lenders act legally and fairly. Take your time to make sure borrowing using buy now, pay later is right for you.

You may from time to time need to borrow money. Most of us do. Just remember to be aware of the real cost of borrowing beforehand, including how will it change your credit score,

which will affect your ability to borrow in the future. Understanding the fees and interest rates will let you know exactly how much this is really going to cost you. Be particularly careful around high interest loans. The interest they carry will be much higher than the interest on credit card debt.

It’s important to read the terms on all loans, and make sure you’ll be able to afford the repayments before you take on the debt.

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