Crash Course in Credit
Borrowing money may be unavoidable at times, but here is everything you need to know about credit before making any hasty decisions.
Many of us will borrow money at some point in our lives - just think about mortgages. Unless you have a stash of cash under the bed (!), you will need to borrow to buy a home. So, rather than thinking of credit as good or bad, it's more helpful to think about whether it is manageable. This means considering whether you will be able to pay it back before the cost of credit outweighs the benefits of what you actually bought.
Remember, anytime you apply for credit (excluding your Student Loan), you will be credit checked.
Most students borrow money to get though university in the form of the Student Loan. While it is a form of credit, it is very different to a loan from a bank. If you can get through uni without having to borrow any money (including the Student Loan), that's great, but many need to. The golden rule about student borrowing is simple -
Borrow in this order:
- Student Loan: Cheaper and more protected than other credit.
- Interest-free Overdraft: No charges while you are studying, but think about how you'll repay before you start getting charged (varies from bank to bank).
- Think very carefully before borrowing anything else: Talking it over with Student Fuding will help you work out if borrowing is necessary and if it is going to be manageable.
Borrowing money is not the solution to having a low income, and can quickly spiral out of control. Get some guidance from Student Funding to keep things on track.
Know the Lingo
Creditor: The company you borrow money from.
Interest: The fee you are charged by the company lending you the money. It is often represented as a %. You can compare the % offered by different lenders to get the cheapest deal.
Debt: The money you owe. You are often said to 'be in debt' when you have borrowed money.
Credit Check: When the company you want to borrow from looks at your financial history to assess if you meet their criteria.
Credit Rating or Credit Scoring: This is the financial history the company looks at when undertaking a credit check. There is no such thing as a universal system as every lender has their own system.
Different ways to borrow a buck
Credit cards allow you to spend money you don't have and apply an interest rate. Best avoided for everyday spending or withdrawing cash (really expensive!), and always pay the balance in full each month to avoid accruing interest.
Store cards are like credit cards that tie you to one store. They usually offer great sign-up deals (25% off your purchase), but they can have high interest rates.
Hire purchase is like a rental agreement. You pay weekly or monthly amounts but don't own the product until you have paid in full. Weekly amounts can seem to be manageable, but interest rates can be massive.
Bank loans are hard for students to come by and involve you receiving a lump sum and paying a regular amount back each month.
Payday loans are short-term loans designed to cover the shortfall before payday. They are not designed for students and are best avoided.