Using credit can be useful, but it can cause money problems and debt if you struggle to keep up with repayments. Find out how to make borrowing money work for you.
Managing credit well
Working out a repayment plan for your borrowing
If you’re considering borrowing money, it’s important you think about how you’ll repay it. By understanding the cost of your borrowing, you can make sure you’re getting the best deal and can make all the repayments.
Follow these steps to work out what you need to do
What affects your borrowing costs
Be aware that as well as paying back what you borrow, you might also have to pay interest and fees.
The interest rate you’ll be charged depends on several factors, including what type of loan or credit you get, your credit score, how much you want to borrow and for how long.
Generally, borrowing less money over a shorter time tends to result in lower interest costs than borrowing more money over a longer time.
Your lender should tell you the full cost of the loan, so you can work out how much you’ll repay in total compared with how much you borrowed.
Find out more in our guides:
Working out the cost of borrowing
You can work out how much it will cost to borrow using the information lenders give you.
By law, when you apply, they must tell you:
- how much you’ll have to repay in total
- how much you’ll have to pay every month
- the interest rates, any fees or charges and the APR.
This information should be on the credit card provider’s or loan lender’s website. It must also be included in the pre-contract credit information form.
The lender must explain the main terms and conditions of the loan before you sign the contract.
With credit cards, this information will be based on assumptions about how you’ll use the card, such as how much you’ll be spending every month.
Find out more in our guide Making sure you can afford to borrow money
Always consider the interest and fees
Interest is usually shown as APR (annual percentage rate). It refers to the total cost of your borrowing for a year. This is more than the interest rate itself because it includes the interest rate plus any arrangement fees.
You can use APR to compare different credit and loan deals, such as on price comparison websites.
Generally, the lower the APR, the lower the cost of borrowing and therefore the better the deal.
Fees
It’s important to check for fees in your terms and conditions. These might include late payment, default, or settlement charges.
Find out more about how to get the best deals using price comparison websites
Should you save, or pay off loans and credit cards?
If you have savings, it might be worth repaying some of your loans or credit cards – but only if you will still have some savings set aside for emergencies and that it doesn’t end up costing you more in fees.
High interest charges on the most expensive forms of debt make it harder to put money aside, so clear these first.
You’ll rarely be able to earn more on your savings, than you’ll pay on your borrowings. So plan to pay off your debts before you start to save.
If you’re considering using savings to pay off debt, make sure any fees you might be charged won’t add up to more than the interest on the debt
Before you increase your credit limit
Are you considering increasing your credit card or overdraft limit? Find out if you can afford it, and what you can do if you’re refused.
Follow these steps to work out what you need to do
What a credit limit is
This is the maximum amount you can spend on a credit card or an overdraft.
Credit cards
You might only be told what your credit limit is when your application is successful.
This might cause a problem if you want to transfer an existing balance to use a 0% deal but your new credit limit is too small to do so. This is because you might only find out your credit limit after a full credit check.
Find out more about ‘hard’ and ‘soft’ credit checks.
Overdrafts
Your bank might agree to give you an overdraft, and they’ll set a limit.
They’ll regularly review it, and can reduce or withdraw it at any time. If this happens and you feel it’s unfair, discuss it with them. If you’re still not happy, you can contact the Financial Ombudsman ServiceOpens in a new window
Find out more about credit cards and overdrafts
Before you increase your credit limit
When considering increasing the amount of credit you want to take on, it’s important to work out whether you can afford the repayments and the interest.
Overdraft interest rates are usually over 40%. Credit card interest rates are also high, unless you’re in a 0% period.
If you pay your credit card bill in full each month and have a consistent income, the bank or card provider might agree to the increase.
However, increasing your credit limit because you’re struggling to pay your bills, including credit repayments, will make your money problems worse. It might be helpful to get debt advice first.
To sort out the bills you need to deal with first to avoid missing payments, try our easy-to-use Bill Prioritiser
Increasing your credit limit
You can ask for a higher limit from your bank or credit card provider.
However, if you’re a new customer, it’s a good idea to wait for several months first. This is so the lender can see that you can make repayments on the credit amount initially agreed.
If you go over your existing limit on your card or miss any payments, your card provider is unlikely to increase your limit.
When you’ve been with a bank or card provider for a while, they might offer you a higher credit limit without you having asked for it. If you decide you don’t want an increase, let them know – they should make it easy for you to opt out.
If you’re considering increasing your credit limit, see our guide Can you afford to borrow money?
If you’re refused a credit limit increase
If you’ve been turned down for a higher credit limit, it’s important not to keep applying elsewhere. This is because making lots of applications will damage your credit score.
Find out more in our guide What to do if you’re refused credit or a loan
Paying off your credit card
Using a credit card for your spending can have many benefits, from added legal protection to earning cashback. But debt can build up if you don’t pay off what you owe in full each month.
Follow these steps to work out what you need to do
Cut the cost of your credit card debt
With the average interest rate charged on a credit card at 22%, owing money on it can be expensive.
Transferring your balance to another credit card with a 0% balance transfer offer, or one charging a lower interest rate, will reduce your monthly payments.
You’ll usually need to pay a fee to transfer your debt over – usually around 3% of the balance transferred.
If you don’t qualify for a 0% deal, look for a card with as low a rate as possible (and ideally one not charging a fee). But remember to look at the balance transfer interest rate, not the APR (annual percentage rate).
These cards are usually only an option if you have a good credit score.
Make sure you pay off your debt before a 0% introductory deal ends, otherwise you might have to pay a high rate of interest on the remaining debt. MoneySavingExpert compares balance transfer cardsOpens in a new window
Try to avoid minimum payments
Minimum monthly repayments tend to be set very low. If you only pay the minimum for 18 months, your credit card provider will contact you. This is because you’re likely to be in ‘persistent debt’ – when you’re being charged more in interest and fees and than you’ve repaid in the last 18 months. Your provider might give you different options to pay the balance faster.
Aim to pay off the entire bill each month, to avoid paying interest. If you can’t do this, pay off as much as you can.
Also, avoid using credit cards for cash withdrawals, as this costs money. You’ll usually be charged around 2-3% of the amount you withdraw as a fee, as well as the interest you’ll pay.
If you’ve missed a payment, use our Debt advice locator tool to find free and confidential debt advice online, over the phone or near to where you live.
Find out more in our guide Help if you’ve been contacted about your credit card and persistent debt
Paying by Direct Debit
Setting up a Direct Debit for your credit card payments will make sure you never forget to pay. It also means you won’t be charged a late payment fee or risk losing the benefit of a 0% introductory rate or promotional offer.
You can usually set up a Direct Debit to pay the full balance, minimum amount, or a fixed amount every month.
If your income varies each month and you’re worried you might not have enough money in your account to cover a Direct Debit, it might be better pay manually.
Find out more about Direct Debits
Set a budget
Preparing a budget allows you to take control of your money.
It’s a summary of the money you have coming in and going out, so you know what you have left to spend each month.
When you've done this, you might be able to see where you can reduce your spending.
Any money you save can then be put towards repaying your credit card debt.
To help you manage your money, try our free and easy-to-use Budget Planner
Join our private Budgeting and Saving Facebook groupOpens in a new window for money-saving tips and support from a community of savers
Prioritise your repayments
If you owe money on more than one type of credit, you’ll need to work out which one to pay off first. This is likely to be the one with the highest interest rate.
Make sure you continue paying at least the minimum payment on each type of credit. Otherwise, missed payments will lead to extra fees and could damage your credit score. This would make it more difficult to get credit in future.
If you have debt secured against your house, for example, make sure you pay these first. This is because the consequences of not paying can be much worse.
To sort out the bills you need to deal with first to avoid missing payments, try our easy-to-use Bill Prioritiser
If you’re facing higher living costs, find out about extra sources of income and support in our section Help with the cost of living