If you’re looking to better your understanding of the wide world of credit, you’ve come to the right place! Most of us have some sort of experience with credit, whether it’s signing up for a new mobile phone contract or paying the mortgage on your house, but do we actually know if we’re using it properly? Navigating the complexities of credit can often feel like deciphering a foreign language. By mastering the ins and outs, you can learn to leverage credit to your benefit and, most importantly, use it responsibly.
So let’s dive into how to use credit responsibly. Thanks to insights from Klarna themselves, we’re able to give you an overview that could help you better understand your credit options.
Credit is the ability to borrow money with an agreement that you’ll pay it back later on. According to money.co.uk, in 2023 78% of UK adults had at least one form of consumer credit, so it’s vital we get learning.
Most forms of credit fall into these two categories:
A sum of money that you borrow and repay over time with a set repayment schedule.These can be interest free (e.g. a Buy Now Pay Later product which typically have shorter repayment periods) or have a fixed or non-fixed interest rate (e.g. a mortgage).
A type of credit that allows you to borrow up to a set credit limit by making minimum monthly payments. If you do not pay your full balance every month, this usually results in interest charges.
You may well have heard the phrase ‘live within your means’ i.e. don’t buy what you can’t afford. It's wise to pay with the money you have. But, there are times when opting for the right form of credit could make sense. For example, sometimes it’s helpful to be able to receive a product before paying, to ensure that you’re satisfied with it. Choosing an interest-free option for one-time larger purchases, such as your yearly holiday or for higher quality items that last longer, could help you manage your budget more effectively without having to pay for everything all at once. This is particularly useful if you’ve spotted a deal or the item you’ve been looking at purchasing has gone on sale and you want to take advantage of that.
There are various forms of credit so, the first thing to do is evaluate the situation. Think about what you’re purchasing, the funds you need, why you need them and then decide whether using credit is within your financial limits.
Secondly, does the payment plan suit the product? The more perishable the item, the shorter the payment period should be, so try to make sure you’re not making payments over an unnecessary amount of time. For example, it could make sense to spread the cost of a larger purchase, like a dishwasher, over the course of a few months as it is a higher value item that you intend to use for a long period of time.
Finally, do your research - when comparing costs, make sure you know exactly what you’re signing up for. Will you be charged interest? What is the repayment schedule? Are there any late payment fees? If anything seems unclear, you can always ask for clarification from your lender.
Another form of credit that has become increasingly popular in recent years is Buy-Now-Pay-Later, which does exactly as it says on the tin. These allow you to purchase an item and either pay the full amount later by a predetermined date or spread the costs over a period of time, usually a few months.
Many Buy-Now-Pay-Later products are interest and fee-free (provided that you pay back on time) and have a specific repayment schedule (this is instalment credit - remembering our terminology from earlier?). Usually they charge a late fee for missed payments.
We hope you now have a clearer understanding of the different types of credit. For a deeper dive, tune into our latest podcast episode where our host, Kia and special guest, Raji Behal from Klarna unravel some of the financial terminology and what to keep in mind when choosing credit as a payment option. Don’t miss it!
That being said, let’s wrap it up with Raji’s top credit tips:
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