So in this post I am hoping that I might be able to save a few of my younger readers from some sleepless nights worrying about credit card debt.
So, to keep this simple, I have managed to land myself in a little bit of a sticky situation with credit cards. Having recently spoken to a personal banker and received some brilliant advice, I decided that these five things should be taught at school! Because, I don't know about you, but most people just think "ooooh, credit cards are bad"... but here's what I have learned (albeit the hard way).
1. What is credit?
Credit basically refers to the money that you borrow. You either have good, bad or no credit. In order to get good credit you have to borrow money from lenders and very simply- you must pay it back. In turn, to have bad credit, you borrow, and you don't pay it back. Finally, no credit- this basically means that you have never borrowed before.
2. You need credit.
Even if you have never borrowed a single incey wincey teeny weeny bit of credit, and you have a job where you are earning £45,000 a year- chances are, at some point, you will still need "credit" on your side. Whether it's to sign a phone contract; fund a well needed dentistry job; or to buy a house...
3. Where to begin.
Once you are 18, the bank will offer you an overdraft. Immediately, you will probably think this is very dangerous and will turn it down. Don't. It is a good idea to get an overdraft. Even just a tiny one, between £50 and £100. If you are earning a small wage, the idea is that each month you will get paid in to this account and the amount that you have spent in your overdraft will be paid off. By doing this, you will begin to build your credit file- by simply borrowing and repaying.
4. Credit cards.
Please know that these little plastic cards are very dangerous when in the wrong hands. You must know that they can completely f*ck your life up if you don't use them sensibly. At the same time though, they are fantastic.So, now it's time to use your imagination.
I want you to think of a really really good friend of yours. Now, they have offered to lend you some money, but they are going to need it back before the end of the month.
If you know that you won't be able to pay that money back to your very dear friend- then chances are, you won't borrow it. You would instead seek money from elsewhere, perhaps the famous bank of mum and dad...
But, if you know and feel confident that you can repay this money. Then go ahead, borrow it.
5. Research
Notice that we imagined a close of friend of yours was lending you money. Please remember this when you come to taking out credit cards. It is very easy (and is actually what I did and how I got in to the mess I am in now) to accept a store credit card... DO NOT DO THIS. Go to your bank, or go to a bank that you know and trust (- a friend). This is because Banks tend to have much kinder interest rates than store cards,but I will discuss that further in the Interest section.
So, it really is worth doing your research to find out which company will offer you the best rates- for e.g. there are some companies that will give you your first 30 months interest free... and there are others that will charge you 39% after your first 30 days.
6. Repayments
So, going back to the scenario with your friend... a key thing that you need to remember, is that you don't want to destroy your friendship with this very good friend of yours, so you must ensure you pay the money back on time.
If, for any reason you can't pay back the entire amount, then you would speak to your friend and say, 'how about I pay you £** this month, and every month until I have paid you off...?' This would be your minimum payment.
It is essential that you pay this amount, because if you don't you will really upset your friend. Remember, they lent you the money as long as you would pay it back within the month- which you didn't; so they agreed that you could pay a minimum amount each month...
So, if you don't pay this back, they're going to be pretty annoyed. And, they are going to tell all of your other friends not to lend you money because you don't stick to your word, and that- basically is your credit file.
The moral of this little scenario that I have made up, is that credit card companies can actually be very very helpful, however they can also turn into the school bully if you don't stick to your word, they can turn everyone against you.
7. Building your credit file.
So, your credit file, building on the friends scenario I used above... your credit file is what your 'friends' (the banks) say about you and your borrowing habits. If you think you have annoyed your friend by missing payments, then sure- they will have put a bad word in against you. If you paid the money back straight away, then they will be telling their friends - 'oh, I lent to suchandsuch and they paid me back straight away'... which therefore, builds your credit file, giving you a better credit score- and encouraging others to lend to you in the future.
8. Interest
So this is the part that can really cause the trouble. Basically, your friend has realised that you aren't going to pay them back, but that is going to cost them money- which obviously they don't want. So, they add interest to your borrowed money. This simply means, that every month that you haven't paid off your outstanding amount, they will increase the amount that you owe them.
Now, there are different types of interest- and they will differ for pretty much every single credit card...
Typically, you will be charged varied interest on card/cash/foreign transactions and there will be a monthly interest, and an annual fee. Long story short- the longer you take to pay back the money you borrowed- the more money you are going to owe. Pretty much all credit card companies will give you the first 30 days on each transaction free of interest.
It is imperative that you know what interest you are paying on your card. Though, if you pay your friend back within that first 30 days every time anyway- then that won't effect you!
Know how much you will be charged to take cash out. This is normally quite a large charge- try not to do this unless it is an absolute emergency.
9. Repairing bad credit
So you have lost the trust of your friends because they know you don't pay them back when you say that they will. So nobody wants to lend you money. This is the tricky part. How do you regain somebody's trust? Well, it takes time, it takes effort, and it takes proving that you aren't going to make the same mistake again... So that is exactly what you have to do.
You must pay off any outstanding debt that you have, if necessary organise a 'debt repayment scheme' with your lender. It is always better to talk to the company and explain your situation than to miss payments.
If you are completely out of depth there are several fantastic companies that will help you every step of the way. (Immediate Financial is a company that has been highly recommended by a few people I know).
10. Credit builder credit cards
So, with my dodgy credit rating at the moment, my fantastic personal banker suggested that I should get a credit builder card. These are dangerously scary- like more scary than ordinary credit cards.
The idea is, even if you have a really terrible credit rating, they will offer you money. This is because they have a hideously high interest rate that means as soon as you build interest on that card you are paying back astronomical amounts. So, they can either make you or break you.
If you are clever with it- you can use it for a while to rebuild your credit, and then you can try to apply for an account with more generous lending conditions.
11. Fake borrowing
This is the best way to use a credit card. It is simple... you only buy things that you already have the money for... for example- if you are buying petrol... pay with your credit card, then use your mobile banking app to transfer the amount immediately. Okay, so it's a little time consuming. But it will build your credit file without you actually ever having to pay any interest.
In summary:
- never ever miss a payment
- don't go wild and buy things that you won't be able to repay
- start borrowing and repaying as soon as you can
- and finally, BE RESPONSIBLE!!!
I hope this post hasn't been too ridiculously tedious for you to read- and I also hope that you might be able to take something away from it.
Have you got any advice that I missed out?
Have you got any advice that I missed out?
