It’s impossible to be financially savvy nowadays without taking a good, head-on look at credit. However, as a nation, we’re also now so used to credit that it is easy to forget that it isn’t free money.
Credit is, in effect, a loan. Being able to work credit to your financial advantage needs to be viewed in light of that. However, credit is invaluable and necessary in many ways, not least as a means of determining what you are like as a borrower to make future loans, mortgages and payments more cost-effective for you.
It is an urban myth that you have one such figure as a Credit Score. There is no universal score as different lenders score differently. However, there are ways to check your credit ratings, and to get a report that you can find here. . This can be a useful starting point to improving your relationship with credit.
There are several enticing traps that, in reality, equate to credit mistakes. These are the top ones to avoid:
Don’t Max Out the Credit Cards
Once again, credit is not free money. If you’re maxing out your credit cards then you need to start taking your financial management in hand with firmer control. You need to use your credit cards enough to demonstrate responsibility, but not so much you are heavily relying on them.
Don’t Just Make Minimum Payments
Whilst you may feel you’re ‘on top of’ your credit situation by meeting the monthly minimum payments, the reality is you’re storing up a bigger problem in the long term. A product that cost you £100 could in reality end up costing many times that once interest gets its way. The Independent newspaper has listed this problem alone in their Top 7 Financial Mistakes to avoid in 2017. Its importance can’t be stressed enough.
Do the Sums Before Chasing Credit
If you’ve got several credit cards, and they’re all pretty full, it’s tempting to chase a 0% rate and clump them altogether. Sometimes this does indeed make sense, but do the sums first. Whilst combining together on a 0% card might make sense, to get the debt under control, you may also find you get stung with high rates if you then use that card for a payment. So shop around, and make sure you’re clear about all of the details, before chasing credit.
Don’t Use Credit Cards for Cash
Often it’s the little payments that end up becoming the big headaches. A grocery shop here, a fuel payment there, and soon you’re looking at hundreds on the card. Unless you are extremely diligent at always paying off your balance in full, don’t get in to the habit of using the credit card as a cash substitute. Many of these purchases would be best made on a debit card instead. Similarly, be warned not to use your credit card to take cash from a bank machine – you are simply robbing Peter to pay Paul, and it’ll cost you more in the long run; more even than making a purchase with the card itself.
Credit is Not All Bad
It’s easy for the puritans among us to take a harsh line and say they will never use credit. However, in reality there are benefits. Using credit responsibly can help to improve your credit rating as you’ve proven yourself to be a reliable borrower. This not only makes it easier to get things like mortgages, or loans, or even things such as monthly car insurance and mobile phone contracts, but also opens you up to the most favourable rates. Furthermore, if you pay for items over £100 using a credit card, you are protected under Section 75 , which isn’t the same for other payment methods. To use credit to your advantage make regular or recurring payments and then pay them, in full, on time.
Credit is Great if You Avoid Common Mistakes
Credit can work to your advantage, but this doesn’t happen by accident. Use mobile apps, spreadsheets, or even a notepad to keep track of your spending and never miss a bill payment. Keep track of Direct Debit payments. Monitor your accounts for errors and fraud. And follow the advice above to ensure you use credit correctly in a way that makes you financially savvy and avoids debt in the future.