The early days of COVID19 were a time of saving, at least for some. The early days of post-COVID19, by contrast, are increasingly a time of borrowing. With that in mind, here are some tips on how to borrow astutely.
Keep on top of your credit record
If you need to borrow then you need your credit record to be in as good shape as it can possibly be. At a minimum, check it once a year for errors. It’s better to check every six months or even once a quarter.
Keep your credit record in mind every time you make a financial decision. The biggest single factor that influences your rating is your track record of making at least the minimum payments on your debts in full and on time every time.
Showing consistency of payment in other ways can help too. For example, if you’re renting, see if your landlord reports your rent payments to the credit agencies. If they don’t, consider registering to self-report.
The other key factors that influence your credit score are:
- Whether there are any negative markers on your file
- How much credit you already have and how it is structured
- Whether or not your credit file has full and consistent details
Here are some specific tips that reflect these factors.
Understand hard vs soft searches
In brief, hard searches are what happen when you make a formal application for credit. Soft searches are what happen when you make a general inquiry about your standing. Hard searches are recorded on your credit record. If you make a lot of them, it can look like you are making numerous applications for credit. This is a warning sign for lenders.
This means that one of the key rules for astute borrowing is to be confident that you’ll be accepted for a product before you formally apply for it. These days, you’ll almost certainly find the lender’s criteria for any product on their website. Many lenders also have eligibility checkers. These do soft searches and let you know if a formal application is worthwhile.
Resist maxing out your credit
As a rule of thumb, you want to stay under 75% of your credit limit both overall and per product. Ideally, 80% should be your absolute maximum (and even then only temporarily). If you go over this, then you risk triggering red flags with potential lenders.
Educate yourself on payment options
Currently, in the UK, there are three main ways of getting credit. These are credit/store cards, loans (of various types) and buy-now-pay-later/instalment schemes. Both credit/store cards and loans definitely will show up on your credit file. BNPL/instalment schemes may or may not appear on your credit score.
Credit/store cards are convenient and widely accepted. They also have reliable chargeback schemes as well as added protection for purchases over £100. They tend to have high-interest rates but you have a certain level of flexibility over how much you pay. You must pay at least the minimum payment. You may choose to pay more.
Loans generally need to be applied for upfront. The length of time it takes to process the application typically depends on what type of loan you need and how much you are borrowing. Loans often have lower interest rates than credit cards. They can, however, end up costing at least as much if you choose to pay them back over a longer period.
BNPL/instalment payments may or may not charge interest depending on the scheme. Even when they do, they can be very economical. The monthly repayments can, however, be much higher than the minimum payments on credit cards. What’s more, if you default, your credit score can suffer.
Make sure that you’re on the electoral roll
Even if you don’t want to vote, being on the electoral roll does boost your credit score, this is a good enough reason to update your records, something we often forget when we move house.
For more information, please get in touch.