What is credit?

To put it simply, credit means ‘buy now, pay later'. The idea behind credit is neat and attractive - you get goods (or money, if it is a loan) straight away, and you pay for them in instalments over a period of time.

Because credit is such an attractive and easy option it can be really easy to get carried away and over-commit yourself. Don't forget that credit comes at a price, too. You will almost certainly have to pay interest on credit deals, so the goods will actually cost you more in the long run.

Credit sale agreement:

This is where you want to buy one item, such as a hi-fi or PC. The shop will arrange a loan with a finance company and you get the goods straight away. You will normally have to pay off the loan by monthly instalments.

Credit cards and store cards:

You will normally have a credit limit which allows you to spend up to a certain amount. Usually, you will be sent a monthly statement, with a minimum payment that you are expected to make, or you can choose to pay off the whole lot, if you can afford it. If you just pay the minimum, or part of the balance, you’ll be charged hefty interest rates on what is left.

Hire purchase, or HP:

This is mostly used for very big purchases, like cars. The goods remain the property of the HP company until the end of the agreement, and you effectively pay a charge to hire them during this time.

If you fall behind in your payments the HP company can repossess the goods, and you won't be able to sell the goods without the HP company's permission. HP is an expensive way of buying goods.

Personal loans from a bank or building society:

You'll normally be expected to have a bank account before you can get a personal loan. Here, you are lent money by the institution, and you will usually pay it off in monthly instalments. Many lenders will insist that you make these payments by direct debit from your account, and you must make sure you have enough money in your account to meet the charges. Personal loans will often be at a cheaper rate of interest, though.

Money lenders:

Sadly, there are many disreputable businesses (loansharks is what they’re commonly called) who will lend you money, no questions asked, at a very high rate of interest. If you’re desperate this can often be a very tempting thing to do - DON'T!

These allow you to pay for the goods in instalments, but at the cash price, or will let you defer payment for a period of time, such as 6 or 9 months. Because these are so attractive it is easy to take on too many of them and over-commit yourself. Remember, you will still have to make the payments regularly, or you could get into debt. Also, if you don’t pay the cash amount by the due date on buy now, pay later deals you will have to pay interest and this will be charged from the date the goods were supplied.

What should I look for if I'm interested in credit?

You should shop around, and compare the different interest rates with different types of credit. Do this by looking at the APR (Annual Percentage Rate). Generally, the lower the APR, the cheaper the credit, as you will pay less interest overall. You MUST make sure that you read the terms and conditions of any credit agreement before you sign it. If necessary, ask for time to read the agreement, and get advice from your Union Welfare Officer, local CAB or trading standards. Remember, it is unlikely that you will be able to cancel the agreement after you have signed it. Also, NEVER sign a blank credit agreement.

Finally, think really hard about whether you really need the goods that you want, and if so, whether you can save for it and pay cash - this will always be the cheapest option!

• Consider whether you really need credit, or whether you would be better off saving up and paying cash

• If you feel that you need credit, do a proper budget of your income/expenditure, and be realistic about what monthly payments you can afford

• Shop around and compare deals

• Always check the Annual Percentage Rate (APR) - the lower the APR the less interest you will pay over the lifetime of the agreement

• Always read the small print - it may seem boring but once you sign on the dotted line, you will have entered into a legally binding agreement

• If you have a credit or store card, try to keep the maximum credit spending limit as low as possible so you aren’t tempted to spend, spend, spend

• If you can, pay off the full balance on your credit or store card every month, to avoid being charged interest

• Keep a regular check on your credit expenditure, and think carefully before taking out any new credit deals

• If you live in shared accommodation, get all the tenants names on the household bills, not just yours!

• Get advice quickly if you get into debt, from your Union Welfare Officer, CAB or trading standards

• Don't take on more credit than you can realistically pay - remember, you are ultimately responsible for the amount of credit you commit yourself to

• Don’t be fooled by introductory discounts for store/credit cards - always look at what the interest rate is going to be, which can often be very high in this sort of deal

• Don't think you can hide from a bad credit history - Credit Reference Agencies keep information about your credit history for years

• Don't EVER sign a blank credit agreement

• If you fall into arrears, don’t ignore letters from credit companies - most will allow you to reschedule the debt if you are having trouble paying

• Don’t borrow more money to get out of an existing debt

• NEVER use a loanshark or moneylender. They charge extortionate rates of interest and often use threats of violence to get their money back

• DON’T PANIC! If you are in financial difficulty, then seek help IMMEDIATELY from your Union Welfare Officer, your local CAB or neighbourhood advice centre, or from trading standards.