Deciding on the best type of credit for you

When you’re borrowing money, it’s important to understand how much the different options cost and how they work. You also need to know how those costs vary depending on the amount you’re borrowing and for how long.

What’s the best credit option for you?

Reason you need to borrow
Consider
Top tips

I want to buy something on credit and have some flexibility in how I can pay it back.

Credit card
Some have 0% deals on purchases over an introductory period (of between 3 and 30 months).

  • Only use if you’re sure you can repay the debt within the 0% period.
  • Cards charge from around 22% interest or more when the introductory offer finishes.
  • Set up a Direct Debit to make sure you don’t miss a payment.
  • Don’t borrow more than you need.
  • If you’ve got a poor credit record you might be offered a shorter 0% period than the one advertised, a higher rate of interest when the 0% period ends, or be turned down altogether.
  • Some cards charge a monthly or annual fee.

I have existing debt I want to pay off as cheaply as possible

Balance transfer or money transfer credit card
Some cards allow you to transfer your debts and pay no interest for up to 18 months. They can be a cheaper option for paying off other debts.

  • Most cards will charge a fee of around 2-4% of the balance transferred.
  • Know how you’ll pay back the amount before the 0% period ends (set up a Direct Debit to pay off regular amounts).
  • You might only qualify for a balance transfer card if you have a regular income.
  • A money transfer card allows you to pay money straight into your bank account for a fee. You can use this cash to pay off other debts.

Find out more:

I want to borrow some money but pay back a fixed amount every month.

Personal loan
Might be cheaper than a credit card over a longer period or for larger amounts. The interest you’ll be charged will depend on your credit rating.

  • There’s often a minimum loan amount (eg £1,000) and duration (eg one year).
  • You must make the monthly payments.
  • Not all personal loans charge a fixed interest rate, so make sure you check.

I only want to borrow a small amount of money for a short period.

Overdraft
Some current accounts offer a £100 to £250 interest-free overdraft up to an agreed limit.

  • Interest rates on overdrafts can typically be around 40%, so other forms of borrowing are likely to be cheaper.
  • Your credit rating could be damaged if you borrow above your authorised overdraft limit.
  • Not for longer-term borrowing as it can be very expensive and the bank can ask for repayment or reduce the overdraft limit at any time.

Find out more:

I want to deal with my debts as cheaply and simply as possible

Debt consolidation loans
Might be available depending on your circumstances. But if you’re struggling financially, it might be best to get free debt advice before taking out such a loan.

  • You might pay less each month, but loans can last much longer so you’d pay back more overall.
  • If you’re having financial difficulties, talk to one of the free, confidential and independent debt advice agencies to help you understand your options for managing your debt.

Find out more:

Where could I turn to if my bank won’t lend to me?

Credit unions
If banks can’t help, a credit union could be an option. These not-for-profit organisations usually serve a particular community or workforce.



Community Development Finance Institutions (CDFIs)

 

  • Run for and by their members, credit unions offer loans (no more than 42.6% APR) and savings.
  • Responsible lenders (known as CDFIs) will charge higher interest rates but might be able to lend to people with thin credit files.
  • Only borrow if you can afford the repayments.
  • These organisations offer a personalised service for a range of people, including those who might struggle to  access mainstream credit.

Find out more:

I’m living on benefits and/or struggling to pay my debts and living costs but I can’t get any more credit.

An interest-free loan you pay back from your benefits or help from your local authority (or the Scottish and Welsh governments)

  • If you’re claiming benefits, you might be able to apply for an interest-free Budgeting Loan or a Budgeting Advance.
  • Get help from a free debt adviser. They can help you draw up a budget, deal with your creditors and see if you’re entitled to any extra benefits.
  • Don’t borrow to repay debts – you can end up trapped in a cycle of debt. Get help with your finances.

Find out more:

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Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
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