Beyond Credit Cards
Credit cards are only one way to build your credit and borrow money. Luma explains other types of credit products offered by banks, building societies, and other financial institutions.
You may not know it, particularly if you’re new to the UK, but your bank account may come with an overdraft facility. This is especially true for current accounts geared towards students. An overdraft is when you withdraw more money than is currently in your bank account.
Some bank accounts allow you to establish an overdraft facility up to a certain amount in advance. Other overdrafts are known as unauthorised overdrafts, meaning you didn’t let the bank know in advance. No matter the type of overdraft, your bank may charge you interest rates and fees. Understand these rates, fees, and repayment terms before you overdraw your bank account. Recent graduates in particular are often unpleasantly surprised by their overdraft repayment terms when they finish Uni.
Store cards work much like credit cards, but differ because you’re allowed to use them only in a given store or chain of stores. Store cards may give you additional benefits in places you shop frequently, but often have high interest rates if you carry a balance.
Having too many store cards open in your name can negatively impact your credit rating. If you don’t use a store card frequently, make sure you close the account.
These cards allow you to make purchases in the same way as a credit or debit card, but you have to pre-load them with money. This means that when you use them, you don’t pay interest and can’t spend beyond your available funds. Pre-paid cards can be useful to help young people become familiar with using cards, without the worry of them over spending. These cards are also helpful for those who may find it difficult to manage their finances or if you’re trying to achieve budget goals, like when you’re going on a trip.
If you’ve had trouble getting a credit card, secured cards may be a good first step in establishing or re-building your credit rating. You put a deposit down as security (sometimes for amounts as low as £50) and can charge a bit over that amount using the card. You can increase your credit limit by increasing your secured card deposit. Over time with responsible use, your secured card provider may increase your credit limit without requiring an additional deposit.
Interest charges will apply because this is a credit product. These cards also generally come with annual fees, so be sure to take that into account before applying. When you use a secured card, be sure to keep the timing of the annual fee in mind so you don’t exceed your secured card’s limit.
Loans – Unsecured & Secured
When you’re making a large purchase, like buying a car, you’re generally applying for an unsecured loan to finance your vehicle’s purchase. These are called unsecured loans because lenders provide these loans based on your credit report alone. If you have poor credit, you’re less likely to be eligible for unsecured loans, particularly those for larger amounts.
Secured loans are based on both your credit report and additional collateral (usually another asset) that the lender has for additional security. If you don’t make loan payments on a secured loan, the lender can take possession of the collateral in compensation. Mortgages are one type of secured loan. If you think you’ll have payment difficulties ahead, be cautious in taking out secured loans as you’ll lose the assets you put up as collateral.
When you’re buying a house or property, a mortgage is the type of loan generally used to finance your purchase. Mortgages are secured to the property in question, meaning you could lose your home if you ever fell behind in payments.
It can be very difficult to get a mortgage if you have a low credit score. Improving your credit score is essential if you plan to take out a mortgage to purchase a home at some point in the future.
Read the Fine Print
The most important consideration when evaluating all of these credit products is knowledge. Always understand a credit product’s rates, fees, and repayment terms before taking on any financial obligations. Getting informed will help you make the choices that are right for you and help you build your credit rating.