Credit & Debt Advice

Here are some of the questions that we get asked about in relation to credit and debt. This can be quite confusing for anyone trying to sort out their finances so we have tried to help clarify some points by giving definitions and some clear ways to help you avoid debt.

To put it simply, credit means 'buy now, pay later'. The idea behind credit is that you get the goods (or money, if it is a loan) that you want 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. You will almost certainly have to pay interest on credit deals, so the goods will actually cost you more in the long run.

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.

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 interest rates on what is left.

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 reposes the goods and you won't be able to sell the goods without their permission.

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.

Sadly, there are many disreputable businesses (loan sharks 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 - but 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 six or nine 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.

You should shop around and compare the different interest rates with different types of credit. Do this by looking at the Annual Percentage Rate (APR). 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 Consumer Direct. Remember, it is unlikely that you will be able to cancel the agreement after you have signed it.