The impact of borrowing money

Choosing the right way to borrow money - for you

Paying off your debt

Borrowing money CAN be done successfully

The impact of borrowing money

Borrowing money can be done responsibly when you have a robust plan to repay it, and ensuring you can afford any changes to your regular budget for the repayment period is essential. Applying for products such as a loan or credit card will likely result in a hard credit check. These can then affect your credit score, as well as appearing on your credit report - more on that later.

A credit report is important because it is one way lenders assess your financial history. A credit score is based on your financial history (information on your credit report) and shown as a number. What is a good credit score in the UK? is one of the most common questions asked by consumers and this depends on the credit report provider you use. Different credit bureaus use different score ranges. It is worth adding that a responsible direct lender will consider other factors, not just your credit score, such as affordability, before deciding whether to give you money.

Applying for credit, whether it is successful or not, leaves a mark on your credit file for 12 months that is visible to other lenders. Too many hard credit checks in a short time frame can be seen by lenders as a sign of financial difficulty - so only apply for credit when you really need it.

Using comparison tools and eligibility checkers before applying is a good idea, some lenders or brokers may carry out a soft check on your report to check your affordability. This cannot be seen by other lenders and won’t have an overall impact on your score. If you’re not sure about what checks are made, take a look at our guide on hard and soft credit checks. Understanding how to improve a credit score is worth the investment of your time, as the it may mean you have more borrowing options, such as better interest rates.

Choosing the right way to borrow money - for you

Is your head in a spin after spending hours on credit card comparison or trying to compare short term loans as another option? That’s understandable. Vast amounts of financial information can be hard to digest in one go.

Here’s our bite-sized breakdown of the different options on the market.

• Short term loans
  

  Short term loans are typically used for emergencies such as urgent home repairs or when your car breaks down and needs to be fixed. Paid in one lump sum, they are usually cleared via monthly repayments and over less time than long term loans.
  The advantage of a short term loan is that they can plug a financial gap to payday and be repaid rapidly.

  But one of the downsides, and a way they differ from long term loans, is that they often carry significantly higher interest rates. Take a deeper dive into related queries and discover what you need to know about short term loans with our expert guide.

• Credit cards
  

  Credit cards can be used in a number of ways. It is common to use them for everyday purchases and simply repay the amount in full each month, a popular way to keep your credit score steady.

  When it comes to borrowing, credit cards are often used to pay upfront for high value goods and services, such as a holiday or new furniture, and then make monthly repayments to clear the debt.

  It is possible to apply for a 0% on purchases credit card. What this means is you can buy items and for a set period of time, you will pay no interest. As long as the balance is repaid by the end of that period, there will be no interest charged.
  
  According to data from the Bank of England, the average credit card interest rate was 22.2 per cent as of September 2022. But they can be higher, or lower, and in many cases the better your credit score and history, the better credit card offers you will be eligible for. Spending time on credit card comparison before you apply will help you find the best deal for your individual circumstances.

• Overdrafts
  

  If you only need to borrow a small sum, or avoid a payment bounce due to insufficient funds, using an overdraft facility could be suitable. An overdraft is essentially an extension to your bank account, agreed by your bank. It allows you to borrow money through your regular bank account by taking out more money than you have in there. It is a type of debt and there are charges for using an overdraft.

  Although overdraft interest rates are capped at 40%, overdrafts can be an expensive way to borrow money if they are relied upon constantly. Plan how you will pay the overdraft back before applying for one, and don’t increase your limit unless it is really necessary, as this can lead to debt becoming unmanageable.

• Buy Now Pay Later
  

  The newest kid on the block when it comes to borrowing is Buy Now Pay Later (BNPL). This is a convenient form of borrowing that consumers will often see built into the checkout when they are shopping online. It allows people to pay for their goods in multiple repayments over 30 days or longer. Although there is usually no interest charged with BNPL, as long as you pay within the agreed timeframe, it still carries risks.

  If payments are missed, there can be late fees, or the BNLP provider may share your details with credit reference agencies. There is a danger, though; due to the ease of borrowing, it is also easier to let a lot of smaller debts mount up over time and buy things that are not needed. This can then lead to repayments becoming unaffordable and eventually, more significant debt problems.

  It is recommended to use Buy Now Pay Later for one-off payments rather than daily spending, understand how BNPL works, and make sure you can repay this debt further down the line.

   

Paying off your debt

In order to borrow money responsibly and ensure good financial health, make sure what you have to pay back monthly is realistic and affordable. One way to do this is to learn how to budget so you know how you will pay off debt from the start. And also only borrow the amount that is actually required.

You could use an online budgeting tool or pen and paper to begin the process of weighing your income against outgoings to see what is left over. Only then will you see how much you can afford to pay back each month.

If you have already borrowed money on a credit card for example and are struggling to pay off debt, you may want to consider a 0% balance transfer card as one option. This type of credit card allows people to transfer an existing credit card balance to a new card with no interest for a set period of time. This can make repayment of the debt cost less, as you will not be paying for interest on top of the amount borrowed.

To use a 0% balance transfer card effectively, you should aim to repay the entire balance within the set period. Bear in mind the interest free period may be just a few months. Any purchases made with the card will incur interest charges. Don’t rush the process of signing up either. It is wise to compare balance transfer credit cards too to secure the best terms for your circumstances. You may also have to pay a fee (sometimes as high as 3%) on the balance you wish to move.

If you are struggling financially or to repay debt, you aren’t alone and reaching out for help is the crucial first step. Improving your financial situation may not be easy but can be done with a consistent approach and over time it will yield results.

Borrowing money CAN be done successfully

The word 'debt' can seem scary, the key things to remember are making a plan for repayments and then sticking to it. No matter what method of borrowing money you choose, visualising the date you will be debt free can help with motivation to make payments.

If possible, making extra repayments will also speed up the process reducing debt and costs. It's worth checking there are no early repayment fees with your credit provider.

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