Let’s talk about borrowing
Wondering about how borrowing and credit actually work? You’ve come to the right place.
Ways to use borrowing
There are different ways you can borrow money and pay it back over time. Some are handy for day-to-day spending, others help you spread the cost of more expensive purchases.
We're talking things like:
- overdrafts
- buy now, pay later
- credit cards
- loans
- car finance
- mortgages.
Used carefully, they can help you buy what you need and be handy back-ups when life throws you surprises.
Borrowing and credit done well can also help you by building up your credit score. So when you’re ready to buy something big, like a car or a house, you’ve got choices.
Credit terms explained
Credit myths
Not everything you hear about credit and borrowing is true. Don’t let these myths stop you going after your goals.
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Not true. When you use credit well, it can work in your favour. Making your payments on time shows lenders you’re reliable and that can improve your credit score.
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Not quite right. It’s not the card, it’s how you use it. Set up a direct debit so you make payments on time and use under 50% of your full limit. That can actually improve your score and show you aren’t reliant on credit.
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Wrong. You’re safe to check your score. Soft checks don’t affect your score at all. Only hard checks, like when you’re applying for credit, make a difference. And even then, only for a short time.
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Unfortunately not. Unlike a well-managed credit card, BNPL services don’t currently help you with your credit score, even when used correctly. But not managing it well, like late or missing payments, can lower your score.
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Not necessarily. Arranged overdrafts can be very useful as short-term borrowing but can cost more than other credit options. Going beyond your overdraft or having payments refused can also hurt your credit score and you may face extra charges.
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Not at all. You may have fewer options, but being on the electoral register and having bills in your name is a great start. Then maybe consider a credit-builder card or small loan, with a balance you can afford to repay, to help you build up a payment history.
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Not right. Paying in full each month can help you avoid paying interest and paying on time shows you’re reliable to lenders and helps build your credit score.
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No. It’s not ideal but get back on track and your score will recover over time. It’s better to get in touch with us if you’re ever concerned about making a payment, as we can help with support or advice.
Understanding credit scores
Credit scores
Your credit score is a bit like your financial reputation with lenders.
A good score usually makes it easier to get approved for credit and can mean you get better rates too.
Your score is built from information like:
- making payments on time, or any missed payments
- how much of your credit limit you use
- how long you’ve had accounts open
- applying for and opening credit-based accounts
- being on the electoral register and having bills in your name.
You don’t have just one score. There are 3 main credit reference agencies that collect and store similar information but work out your score differently.
Check your credit score
Credit, what's it for?
Not all borrowing is the same. Let’s look at the options.
|
Type of borrowing |
It's good for |
What it is |
Be aware |
|---|---|---|---|
|
Type of borrowing Overdraft |
It's good for Paying a bill before payday. |
What it is Allows you to spend more than you have in your account, up to a limit. |
Be aware Can be expensive if you stay in it for too long or go over an agreed amount. |
|
Type of borrowing Credit card |
It's good for Travel, some bigger buys like appliances, or emergencies. Everyday spending and items you might return, like clothes bought in multiple sizes. |
What it is A flexible way to borrow money up to a limit. You can pay it back over time and pay interest or clear it in full each month. |
Be aware Costly if you only make minimum repayments. |
|
Type of borrowing Personal loan |
It's good for One-off purchases you want to pay for over time, like home improvements, your dream wedding or a new car. |
What it is A set amount of money you borrow and pay back with interest in fixed monthly payments. |
Be aware Can take a long time to pay off, depending on the loan period. |
|
Type of borrowing Buy Now, Pay Later (BNPL) |
It's good for Trainers, tech or clothes. |
What it is Lets you split a purchase into smaller payments, often interest-free if you pay on time. |
Be aware Doesn’t currently help build your credit score and could harm it if you miss payments. |
|
Type of borrowing Car finance |
It's good for Your first car or your next. |
What it is A more flexible way to finance or lease your next car, tailored to your needs. |
Be aware You may not own the car until the end of your agreement. |
|
Type of borrowing Mortgage |
It's good for Buying your first home. |
What it is A long-term loan to buy a home, paid back over a long time. |
Be aware Usually requires a big upfront deposit. |
Credit can help you make things possible by spreading the cost. But it’s good to know how much you can afford, and what borrowing is right for you, before applying for any credit products.
Learn more about credit cards
Watch our bite-sized videos to find out more.
Good money habits
Simple ways to make life easier and hit your goals.
Stay safe from fraud
Some steps you can take to keep your money safe.
- Never share your PIN or password.
- Check your accounts and Your Credit Score for anything that looks wrong.
- Use strong logins and two-factor authentication.
You can watch our short video for more information (1 min 45s).
Explore your borrowing options
Borrowing is a big decision and we're here to help.