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A Guide to Borrowing

A simple guide to debt and credit, highlighting the pros and cons of each, to help you make the best borrowing financial decision.

A simple guide to debt and credit, highlighting the pros and cons of each, to help you make the best borrowing financial decision.

Talking about money has been, for as long as money has existed, a practice that people have struggled with. Whether it's a fear of it being seen as gloating when things are going well, or making people feel awkward when times are tougher, we skirt around the issue and play down the good and the bad.

It can be difficult, but not talking about money can make circumstances worse. It’s particularly the case today. The cost of living is going up fast and, for many, that means taking out debt and credit - and necessary discussions on how to handle each.

Debt and Credit: The Differences

A common assumption is that we are the only one in debt or employing credit. The truth is that people around us will be too and talking about it will help to determine best practice.

Debt is born of a set amount of money borrowed from a lender, there will be a repayment period and an associated interest rate (which may vary over the course of the repayment period) and it will be expected to be paid back in line with the terms agreed at the outset. Once it’s paid off, the account is closed.

Credit, on the other hand, is being given access to a set amount of money that can be used when and how we please - the money can be spent, paid back, and then used again. There will be a minimum repayment amount each month, relating to the balance and an interest rate, but if the credit is fully paid off - as it should be - the full amount becomes available for spending once again.

It’s very important to remember that both forms of borrowing will register on a credit profile, as will the way each is managed. This will influence the ability to obtain credit in the future.

Which to Use

Whether to make use of debt or credit, with their overlapping traits, will depend on personal circumstances. This is where talking is so important.

Our friendship circle will have good and bad experiences of one, the other or both, and finding out approaches that have worked well - and also those that have worked less well - can be invaluable in deciding how to proceed when a little help is needed.

“Credit” is often shorthand for “credit card”. Our flexible friend, as it was once known, can be particularly useful for balance transfers - an outstanding borrowing balance on another card that we transfer to remove interest charges.

An interest-free balance transfer can be a step towards repairing a credit profile and purchases on a credit card can amass “points” for future spending. This can improve finances but will most often only work if the balance is paid off in full each month.

And when we say “debt”, we generally mean a loan. This can be useful for larger purchases to be spread over a long period - to help manage cash flow. In the case of furniture, for example, there may be interest-free options available.

Stigma relating to credit and debt is not helpful. Times are tough and each, if used responsibly and informedly, can be added to our armoury when it comes to managing our finances.

Our budgets will determine how much we can afford to repay each month. Available interest rates will play a part here and it’s vital to set up either Direct Debits or standing orders to ensure we maintain, at the very least, minimum payments and service our debt.

Both debt and credit can afford us some breathing space but they shouldn’t be used as a way of kicking the can down the road. Using a credit card for day-to-day expenses is not encouraged and, if money problems are emerging, there may be funds available from the local council, the national government or, yes, friends and family. These options can make much more sense than taking on interest-bearing debt or credit.

Most importantly, talk. Our money worries are never as unique as we think.

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