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What is credit?
Although they all have a similar purpose, there are many types of credit to choose from.
A quick summary
A brief description of credit
Very simply, credit makes it possible to borrow money now and repay it over a period of time, which could be helpful if you’re planning a large purchase, want to consolidate existing debt balances, or need to manage unexpected costs.
For extending credit to you, lenders and other service providers may charge interest, fees and other costs. Your borrowing costs will depend on the terms of your credit agreement, how much you borrow, and how long it takes to repay.
A credit limit
Common on credit cards, overdrafts and store cards, the clue is in the name. This is a pre-agreed amount you can borrow up to, without being charged additional over limit fees. If you go over the maximum credit limit, in addition to fees, your credit score could be impacted.
Interest rates
Essentially a charge for using credit, the amount of interest you’ll pay is worked out as a percentage of the money you borrow. Generally speaking, the higher the percentage, the more it’ll cost to borrow, and vice versa.
Monthly payments
Most credit products require you to make regular payments, as detailed in the terms and conditions of your credit agreement. It’s important to make payments on time to avoid additional fees and charges, losing any introductory or promotional interest rates, and to prevent any negative impact to your credit score and record.
Fees and charges
In addition to interest, things like annual fees may apply to some accounts. Charges may apply for things like missed or late payments, going over your credit limit, cash withdrawals and using cards outside of the UK. Refer to the terms and conditions of your account to understand all costs.
Types of credit
There are many types of credit available. Below we’ve provided descriptions of the main ones:
What is a credit score?
When you apply for credit, lenders and service providers contact their preferred credit reference agencies to check your credit record. This may highlight any potential risks associated with offering you credit, and can influence the interest rates and any amount of credit you’re offered.
Not only that, but lenders and other service providers complete their own credit scoring (PDF 139kb) when you apply for credit, including information from your credit record. They also consider factors like affordability and any past account history.
How using credit affects your credit score
The way you use and manage credit is just one factor which could impact your credit score, although the amount you borrow, the age of your accounts and how well you manage payments and credit limits can all have a bearing on your rating.
Other factors include being on the electoral register, how often you move home and change your address, how well you manage household bills, and even who you have financial links with.